OPERATING DECISIONS 139
Table 9.12 Vehicle Parts Co.
Existing
machine
New CNC
machine
Original cost 250,000 1,000,000
Depreciation at 20% p.a. fully written off 200,000
Available hours (2 shifts) 1,920 1,920
Set-up time 35% 5%
Running time 65% 95%
Available running hours 1,248 1,824
Hours per part 0.5 0.35
Production capacity (number of parts) 2,496 5,211
Market capacity 2,500
Depreciation cost per part 0 80
Material cost per part 75 75
Labour and other costs per part 30 20
Total cost per part 105 175
Mark-up 50% 53 88
Selling price 158 263
Maximum selling price 158
Effectivemarkdownoncost −10%
accountant argued that depreciation is a cost that must be included in the cost of
the product and prepared the summary in Table 9.12.
If the capital investment was not made, volume would decline as a result of
quality and delivery performance. If existing prices were maintained, reported
profitability would decline by £200,000 p.a. (the depreciation cost). If prices were
increased to cover the depreciation cost, volume would fall further and profitability
would decline.
There was little choice but to make the capital investment if the business was
to survive. On a target costing basis, unless volume increased there was little
likelihood of an adequate return on investment being achieved. VPC believed
that, under a lifecycle approach, volume would increase and returns would
be generated once quality and delivery performance improved with the new
equipment. On a relevant cost basis, once the capital investment decision had been
made, depreciation could be ignored as it did not incur any future, incremental
cash flow.
This case is a good example of how accounting makes visible certain aspects of
organizations and changes the way managers view events, i.e. that events were
socially constructed by accounting, a concept that was introduced in Chapter 5.