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| Hermo Company has just completed a hydro-electric plant at a cost of $21,000, The plant will provide the company’s power needs for the next 20 years. Hermo will use only 60% of the power output annually. At this level of capacity, Hermo’s annual operating costs will amount to $1,800,000, of which 80% are fixed. Quigley Company currently purchases its power from MP Electric at an annual cost of $1,200, Hermo could supply this power, thus increasing output of the plant to 90% of capacity. This would reduce the estimated life of the plant to 14 years.charge for the decreased life should be based on the original cost of the plant calculated on a straight-line basis. The minimum annual amount that Hermo would charge Quigley would If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in the life of the plant and the appropriate variable costs. Hermo has decided that the charge for the decreased life should be based on the original cost of the plant calculated on a straight-line basis. The minimum annual amount that Hermo would charge Quigley would be A. $450,000 B. $630,000 C. $990,000 D. Some amount other than those given. |