ACC223

SHUTDOWN, REPLACEMENT

1. Boa Mining Company currently is operating at less than 50% of practical capacity. The management of the
company expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price
per ton is P3 and the variable cost per ton is P2. Fixed costs per month total P10,000.

Management is concerned that a further drop in sales volume will generate a loss and accordingly is considering
temporarily suspending operations until demand in the metals markets rebounds and prices once again rise.
Management has implemented a cost reduction program over the past year, but at this point suspension of
operations appears to be the only viable alternative. Management estimates that suspension of operations would
reduce fixed costs from P10,000 to P4,000 per month.

At what sales volume per month will the company be indifferent between continuing to operate the mine and
closing it?

2. The Mark X Corp. contemplates the temporary shutdown of its plant facilities in a provincial area which is
economically depressed due to natural disasters. Below are certain manufacturing and selling expenses.
1. Depreciation 5. Sales commissions
2. Property tax 6. Delivery expenses
3. Interest expense 7. Security of premises
4. Insurance of facilities

Which of the following expenses will continue during the shutdown period?
a. All expenses in the list. c. Items 1, 2 and 3 only.
b. All except 5 and 6. d. Items 1, 2, 3, 4, 6, and 7 only.
3. Chow Foods operates a cafeteria for its employees. The operations of the cafeteria requires fixed costs of
P470,000 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging P1,200,000 per
month. The company has the opportunity to replace the cafeteria with vending machines. Gross customer
spending at the vending machines is estimated to be 40% greater than the current sale because the vending
machines are available at all hours. By replacing the cafeteria with vending machines, the company would
receive 16% of the gross customer spending and avoid cafeteria costs. A decision to replace the cafeteria with
vending machines will result in a monthly increase (decrease) in operating income of
a. P182,000 b. P258,800 c. (P588,000) d. P18,800
4. In equipment-replacement decisions, which one of the following does not affect the decision-making process?
a. Current disposal price of the old equipment.
b. Operating costs of the old equipment.
c. Original fair market value of the old equipment.
d. Cost of the new equipment.

5. JKL Company is considering replacing a machine with a book value of P100,000, a remaining useful life of 4
years, and annual straight-line depreciation of P25,000. The existing machine has a current market value of
P80,000. The replacement machine would cost P160,000, have a 4-year useful life, save P50,000 per year in cash
operating costs. If the replacement machine would be depreciated using straight-line method and the tax rate is
40%, what would be the increases in annual income taxes if the company replaces the machine?

6. Flowers For Everyone is considering replacing its existing delivery van with a new one. The new van can offer
considerable savings in operating costs. Information about the existing van and the new van follow:

Existing van New van

Original cost P100,000 P180,000
Annual operating cost P 35,000 P 20,000
Accumulated depreciation P 60,000
Current salvage value of the existing van P 45,000
Remaining life 10 years 10 years
Salvage value in 10 years P0 P0
Annual depreciation P 4,000 P 18,000
If Flowers For Everyone replaces the existing delivery van with the new one, over the next 10 years operating income
will: