Smeal College of Business Managerial Accounting: B A 521Pennsylvania State University Professor HuddartSpecial Electric CompanyThe Microetching Department of Special Electric Company manufac-tures products A and B. Product A is sold directly to industrial customers.Product B is a home-use version of Product A that is sold to retailers.The electrocyber machine used by Microetching Department broke downon December 31. It was clear that this machine was no longer usable. TheMaintenance Department did not feel that they could return the machine toreasonable operating efficiency. Upon receiving this information, the man-ager of the Microetching Department immediately made a request to cor-porate management for the $1,100,000 that would be required to acquireand install a new machine. However, corporate management responded byrequesting a complete analysis of the acquisition giving specific considera-tion to dropping the Microetching Department and selling the company’spatent on the electrocyber machine. The company has received an offer of$1,700,000 for this patent.Investigation of the situation has provided the following information:The old machine cost $750,000 three years ago and is beingdepreciated over five years on a straight-line basis for financialreporting purposes. As a broken-down machine, it can be sold for$40,000, but it will cost $20,000 to remove it from the premises.The patent was acquired from another company three yearsago for $1,600,000 and is being amortized (i.e., written off as anexpense) straight-line over its life for reporting purposes. Thepatent has a remaining life of five years.If the department is closed, the manager would be madeassistant manager of a larger department. In his new post, he wouldreceive a salary of $85,000, which is $4,000 less than the companywould have to pay to fill the assistant manager’s position with anequally-competent outsider.The new machine would reduce the annual maintenance costto $60,000. The $1,100,000 acquisition price would be depreciatedstraight-line over the five year expected life of new machine. An ex-pected salvage value of $100,000 would be recognized in calculatingdepreciation for financial reporting purposes.The space-related costs consist of allocated charges for buildingcSteven Huddart, 1995–2009. All rights reserved. www.personal.psu.edu/sjh11B A 521 Special Electric Companymaintenance (50%), depreciation (30%), and property taxes (20%).The department uses 6,500 square feet of space, and the averageannual cost per square foot for operating the building is $50. If thedepartment is eliminated, this space will be left idle for 2010, butat the end of that year, demand for space by other departments willhave increased sufficiently to require use of this space, if available,or some other similar space. Similar space in an adjacent buildingcan be rented externally at an annual cost of about $80 per squarefoot. Special Electric has entered into a contract to move all of itsoperations to a new facility on January 1, 2012. The new facilitywill be large enough to easily accommodate all of Special Electric’soperations. Because the facility is in a remote location, there is noprospect of renting out surplus space.The departmental income statement for the year just ending is:Microetching DepartmentIncome Statement for the year ended December 31, 2009Product A BSales (units) 2000 2000Sales (orders) 2000 500Sales 3,750,000 1,000,000 4,750,000Variable Manufacturing Costs (1) 2,600,000 400,000 3,000,000Variable Selling Costs (2) 600,000 150,000 750,000Total Variable Costs 3,200,000 550,000 3,750,000Contribution Margin 1,000,000Other CostsMachine Depreciation 150,000Patent amortization 200,000Manager’s salary 75,000Machine maintenance 100,000Space-related costs 325,000Total Other Costs 850,000Departmental Income $ 150,000(1) These costs vary with the number of units produced.(2) These costs vary with the number of orders processed.Page 2Special Electric Company B A 521To simplify calculations, ignore income taxes. If you choose to use NetPresent Value Analysis, assume the appropriate discount rate is 10% per an-num.Questions:1. From the shareholders’ perspective, should the Microetching Depart-ment cease operations or should a new electrocyber machine be pur-chased?2. Suppose the individual making the decision is compensated on the totalof Departmental Incomes for all of the Special Electric Departments aftergain or loss on the disposal of assets. The decision maker will retire atthe end of 2010. What decision do you think that person would favor?Why?3. Assume the electrocyber machine is replaced. Both Product A andProduct B must be processed in the electrocyber machine. The machineis available for processing for 5,000 hours per year. Each unit ofProduct A requires 2 hours in the electrocyber machine. Each unit ofProduct B requires 0.5 hours in the electrocyber machine. A one-timeonly special order is received for 100 units of Product B at $300 perunit. Budgeted sales (units and dollars) and costs for 2010 are identicalto 2009 actual costs. Variable selling costs attributable to this orderwould amount to $300. Should this order be accepted? Suppose thedecision to accept this order lies with the decision maker described inquestion 2. What decision do you think that person would favor? Why?Page