The Shamrock Manufacturing Chicago works director. Sean Fitzpatrick is contemplating replacing a big piece of fabrication equipment. Mr. Fitzpatrick is besides inline for a publicity to Shamrocks larger Houston works within the following twelvemonth. and is hesitating to do any determinations that will cut down short-term runing income and his public presentation rating. While the prospective replacing equipment promises to cut down hard currency operating costs. it costs $ 90. 000. every bit good as the loss on disposal cost of the old equipment. which has non to the full depreciated. Prior to doing a determination. Mr. Fitzgerald must place all relevant costs and take a determination for the best involvement of Shamrock ( Datar. Rajan. 2013 ) .
The available informations to see in this instance is the old machines purchase monetary value ( $ 150. 000 ) ; the current book value of the old machine ( $ 60. 000 ) ; the market value of the old machine ( $ 36. 000 ) ; the cost of the new equipment ( $ 90. 000 ) ; and the decrease in one-year hard currency operating costs ( $ 32. 500 ) . All historical costs are considered irrelevant. as they have already occurred and have no consequence on future costs. The lone relevant costs that should be considered for this determination are the future hard currency operating costs. the disposal value of the old machine. and the cost of the new machine that will be deprecated over the following two old ages.
Based on the # 1 and # 2 worksheets in Appendix A of this papers. twelvemonth one yields an addition in outgos of $ 6500. but includes the $ 24. 000 loss of disposal of the old machine. which is irrelevant. The lone relevant information is the entire biennial costs shown on worksheet # 2 that shows a decrease in entire relevant hard currency flow of $ 11. 000. The consequences of worksheet # 1 are non good for Mr. Fitzgerald. but the overall consequences in twelvemonth two benefit Shamrock. Based on the # 3 worksheet. with a lower new equipment cost ( $ 77. 000 ) . twelvemonth one interruption even. which is irrelevant. and the entire biennial decreases in entire relevant hard currency flow are $ 24. 000.
Based entirely on the worksheet information ( Appendix A ) . the company should replace the equipment. All relevant costs located in worksheets # 2. and # 3 indicate that Shamrock fabrication will profit by replacing the machines at either equipment cost. However. worksheet # 1 nowadayss a job for Mr. Fitzgerald as it shows a $ 6500 addition in the first twelvemonth disbursals. which are irrelevant in the long-term. but may promote Mr. Fitzgerald non to buy the new equipment because it may reflect severely on the short-term cyberspace runing income of his works during the rating period for his publicity. Worksheet # 3 offers a breakeven scenario in the first twelvemonth and a $ 24. 000 decrease in relevant hard currency flows in twelvemonth two. which is the best option for Mr. Fitzgerald and Shamrock. if available.
Datar. S. . Rajan. M. . ( 2013 ) . Financial and Managerial accounting. custom edition. Pearson Learning Solutions. Ch. 9
Shamrock Manufacturing relevant hard currency flow analysis
5-Step Critical Thinking Decision-Making Process Matrix
Measure 1: Identify the job ( s ) and uncertainnesss.
What precisely is the problem…
Sean Fitzpatrick has an chance to diminish long-term hard currency flow by replacing a big piece of works equipment.
The job is this …
Mr. Fitzpatrick is up for a publicity and is concerned that any short-term lessenings in runing income will impact his public presentation rating.
This is an of import job because…
Mr. Fitzpatrick’s determination may be good for the company. but could ache his calling aspirations.
The cardinal inquiry ( s ) that needs to be answered to work out this job is… What is the best determination for white clover in the long-run?
Measure 2: Obtain information.
The undermentioned information is needed to reply this question… What are the relevant costs that impact the determination to maintain or replace the equipment? Based on the # 1 and # 2 worksheets. what determination would be made in old ages one and two? Based on the # 3 worksheet. would the determination be different for old ages one and two compared to the initial cost of the new equipment?
Some of import premises I am utilizing in my thought are…
I believe that the best determination for Shamrock is non the best determination for Mr. Fitzpatrick. which creates an ethical quandary.
The points of position relevant to this job belong to…
Note: Remember to see the information you have obtained for possible prejudice. This is from the position of your ain prejudice to the research and the prejudice of the writers who compiled the informations and the research you gathered. In other words. make non dismiss the importance of other’s informations because of your ain prejudice ( is ) . Step 3: Make anticipations about the hereafter.
If this job gets solved. some of import deductions are… Long-run relevant hard currency flows will be reduced. and runing income will increase.
If this job does non acquire solved. some of import deductions are… An chance to diminish relevant hard currency flows will be missed.
The possible alternate solutions to work out the job are… Keep the position quo or do a tough determination that will profit Shamrock in the long-run.
Note: if the job is unidimensional. there may be merely one right solution. Measure 4: Brand determinations by taking among options.
What is the best solution and why…
By the new equipment. because it decreases long-term relevant hard currency flows.
Measure 5: Implement the determination. evaluate public presentation. and learn. In concern. the 5th measure in the determination devising procedure is execution. In the MBA plan. most times you will stop with Step 4 since you will non hold the chance to implement. You may be asked to develop an execution program and urge how you will measure public presentation in some assignments.