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CoursHeroTranscribedText: Santana Inc. manufactures pianos. .The end product is produced in different departments within the plant. .The keys of the piano is causing some concern. " The component is integral to the production of pianos, but is readily available in. the marketplace. "The machine used to produce the keys of the piano is nearing. the end of its useful life and management is trying to decide whether to replace it or outsource the supply. All-88 piano keys are produced and sold as a unit. + The current manufacturing costs of the keys are as follows:1 Direct materials $23.250 per unita Direct Labour $14.00 per unita Variable manufacturing overhead $5.00 per unit Variable general administration $6.00 per unit Other costs related to the key department: Supervisiona $240,000 per year Amortization $360,000 per year General Administration $400,000 per year The plant can produce 100,000 units per year. .It needs.65,000 units for piano production and sells 20,000 units externally at a price of $68.00. It incurs variable selling costs of $4.00 per unit when it sells the keys externally. .Their policy is to fulfil internal-requirements first, then sell keys externally. I Cadence Corporation has approached Santana with a proposal to produce keys. for them. "The cost would be $67.00 per unit. Cadence guarantees on-time. delivery and has agreed to a penalty of 25% of revenue on any late shipments. .. Cadence has further agreed to provide up to-90,000 units per year and has guaranteed the price of $70.00 for the entire five year contract. | Santana can purchase a new machine to replace the existing equipment used to- produce keys for $4,850,000. It is anticipated the new machine will result in. labour cost savings of 10%. "All other costs will remain the same. .The new. machine's useful-life is expected to be 5 years and its residual value at that time will be $150,000. . It will be classified as a class.8 asset for tax purposes, with a. CCA of 20%. .The capacity of this new machine will be 100,000-units per year. .. The corporate tax rate is 35% and the company requires a 10% return, after tax,. on this investment. I Management of Santana asked its marketing research group to determine the anticipated demand for pianos over the next-5 years. -Management also asked. the group to determine whether the excess capacity could be used to produce. keys for external sales

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