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Differential Costs and Decision Making for St. Mary Mills

St. Mary Mills, Inc. (SMM) uses high-quality looms to manufacture its textile products. SMM has decided to replace one of its looms and has researched the following cost data on replacement looms. Using the following cost data, decide which alternative the company should pursue with respect to buying and operating a new piece of equipment. Use the differential-cost approach.
Severn Old Mill
Manufacturing Supplies
Cost of new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,300 $55,000
Lifetime service and maintenance contract . . . . . . . . . . . . . . . . . . . . . . 1,200 4,800
Resale value of old equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 500
Expected fixed operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 120
Original cost of old equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 20,000

Solution Preview

Differential costs are future costs that change as a result of a decision. Therefore, if we take the information provided we are able to break down the costs for each machine to see which would be a better purchase for the company. The differential costs are ...

Solution Summary

This shows how the ficticious company St. Mary Mills, Inc. uses differential costs and decision making to justify the purchase of a new machine.

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