1. Prepare an analysis to determine if Adelaide Industries should replace the ex

Question

1. Prepare an analysis to determine if Adelaide Industries should replace the existing machine.

2. What costs are irrelevant to the decision as to retain or replace the machine?

Adelaide Industries is considering the replacement of an antiquated machine in its Acme Division with a book value of $20,000 and original cost of $55,500 that has been slowing down production because of breakdowns and added maintenance.

The operations manager estimates that the current machine still has 2 more years of possible use but could be sold for $5,000. Estimated repairs for the current machine are $2,500 over the next two years. The machine produces an average of 50 units per day at a cost of $6.50 per unit, whereas other similar machines are producing twice that much. The unit slls for $8.50. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $55,000 and have a 2-year life. Repairs on the new machine over the next 2 years are estimated to be $500.

Explanation / Answer

1) Analysis for Replacing the existing machine:

Decision : Adelaide industries can replace the existing mechine.

2) Costs that irrelavant for decison is:

a) original cost of the old machine,since its past cost

2) all revenues and costs of existintg machine is irrelvalant, since these are common cost under two alternatives.

Explanation existing new Machine incremental   1) Books value $ (20,000) (55,000) (35,000) 2) Repairs $ (2,500) (500) 2,000 3) Salvage value at the end of life $ 5,000 ----- (5,000) 4) Profit $ 52,000 104,000 52,000 Net benifit $ 34,500 48,500 14,000

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