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    Relevant costs and revenues

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    A company is thinking about changing the layout of the facilities with these estimations in mind:

    -Machine moving and reintallation will cost $100,000
    -Total sales will increase by 20% to $1,200,000 b/c of a decrease in production cycle time required under the new plant layout. Average contribution margin (sales dollars - flexible costs) is 31% of sales.
    -Inventory-related costs will decrease by 25% because of an expected decrease in work-in-process inventory. Currently, the annual average carrying value of work-in-progress inventory is $200,000. The annual inventory financing cost is 15%.

    Should the company implement the proposed changes in layout?

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    Solution Preview

    Please see attached file.

    moving machine and reinstallation is $100,000
    total sales go up 20% to $1,200,000 b/c of a decrease in...
    Average contribution margin (sales-flexible cost) is 31% of ...

    Solution Summary

    This explains the concept of relevant costs and decision making