Murl Plastics Inc. purchased a new machine one year ago at a cost of $42,000. Al
ID: 2406067 • 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
(1) Income statement
(2) If new machine is purchased, annaul income of the company will increase by $14,000 and this increase in income will accrue for the next 5 years.
New machine is not purchased New machine is purchased Incremental revenue Sales 147,000 147,000 0 Less: operating costs - 29,400 - 9,800 19,600 Operating profit 117,600 137,200 19,600 Less: Depreciation - 7,000 - 12,600 - 5,600 Less: Selling expenses - 88,200 - 88,200 0 Net income 22,400 36,400 14,000Related Questions
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