Murl Plastics Inc. purchased a new machine one year ago at a cost of $42,000. Al
ID: 1175104 • Letter: M
Question
Murl Plastics Inc. purchased a new machine one year ago at a cost of $42,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below:
“Even though the new machine looks good,” said the president, “we can’t get rid of that old machine if it means taking a huge loss on it. We’ll have to use the old machine for at least a few more years.”
Sales are expected to be $147,000 per year, and selling and administrative expenses are expected to be $88,200 per year, regardless of which machine is used.
(Leave no cells blank - be certain to enter "0" wherever required.)
Compute the net advantage of purchasing the new product using relevant costs.
Murl Plastics Inc. purchased a new machine one year ago at a cost of $42,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below:
Explanation / Answer
1a) Income statement if continued with present machine: Amount for 5 years Sales $147,000 Less: Operating Expense 29400 Depreciation 7000 Selling and Admin expense 88200 Total expense 124600 Net Income $22,400 1b) Income statement when new machine is purchased: Amount for 5 years Sales $147,000 Less: Operating Expense 9800 Depreciation 12600 Selling and Admin expense 88200 Total expense 110600 Net Income $36,400 2) Net advantage of purchasing the new product using relevant costs: Relevant Costs Present Machine New Machine Advantage Annual operating costs 29400 9800 19600 Annual SL Depreciation costs 7000 12600 -5600 Net advantage on relevant costs 14000
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