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澳洲留学生会计专业CASE STUDY样本:Cisco Tractor C

Cisco Tractor Corporation1
Cisco Tractor Corporation owns and operates a transmission and axle plant which
澳洲论文网manufactures more than 50 percent of the transmissions and axles used in the complete line of tractors and harvesting equipment offered by Cisco to the agricultural industry. With an extensive machining processes performed on the steel parts for the final transmission and axle assembly, a very large amount of steel shavings and bulky steel scrap is generated in this plant. The unprocessed steel scrap is sold as a by-product of the manufacturing operation to various firms involved in the recycling process.

The executive committee is currently evaluating whether to process the scrap into different grades and types of usable steel. Using different models of chip crushers, the scrap is grinded and compressed into either “rough” or “fine” scrap. The fine scrap fetches a higher market price than the rough scrap. Cisco has to decide whether to invest in the higher-cost chip crusher (HCC) to produce fine scrap or the lower-cost chip crusher (LCC) to produce rough scrap.

As a financial analyst of the company, you had gathered relevant purchase prices and costs of the two chip crushers from the supplier of the chip crushers and the
marketing and production staff. Key estimates of financial data for the two machines are shown in Table 1.

The estimates for annual operating costs include the following items:
a) The overheads include direct operating expenses incurred in the production of the fine or rough scrap and a fixed amount of $30,000 per annum to cover the Head Office overheads.

b) Salaries represent the costs of employing two new machine operators at a salary of
$40,000 per annum each. For machine HCC, the company would only need to employ a new machine operator and the second, who earns $70,000 per annum, will be transferred from the axle assembly plant. The second operator from the main plant would otherwise have been laid off with a redundancy payment of $50,000.

c) The marketing cost is based on the standard allocation of the new investment towards group advertising expenses, which is 10% of annual revenue. It has been estimated that the additional group advertising required promoting the sales of fine or rough scrap is only $40,000 per year.

Cisco is a private company, soundly financed and consistently profitable. Cash and deposits are not sufficient to buy the chip crusher. However, Mr Jack Murray, the Chairman of Cisco, is confident that the cost of the chip crusher could be financed with medium-term debt. Preliminary discussions with Cisco’s bankers led Mr Murray to believe that the firm could arrange a 12 percent 4-year term loan of $400,000 for either machine with repayment of fixed annual interest expense in advance2 and the principal owing at maturity. The company’s tax rate is 30 percent, and its nominal cost of capital is 15 percent per annum.

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