Biscayne Bay Kayaks manufactures and sells 2,000 kayaks each year. Manufacturing
ID: 2490812 • Letter: B
Question
Biscayne Bay Kayaks manufactures and sells 2,000 kayaks each year. Manufacturing is done in batches of 25 hulls each. Each kayak sells for $6,995. The company uses a machine to form the hulls of the kayaks. The machine was purchased five years ago for $300,000. It is being depreciated using straight-line depreciation with zero salvage value at the end of its 10-year useful life. The old machine can be sold now for $100,000. The company has the opportunity to purchase a new machine for $250,000. It would have a useful life of five years with a salvege value of zero. The new machine would save on the batch cost and the direct materials. Additional information:
Old machine
New machine
Batch setup cost
Old--three workers two hours
$ 150.00
New--two workers one hour
$ 50.00
Raw materials per hull
Old--
$ 3,025
New--
$ 3,000
2.1 Should Biscayne Bay Kayaks purchase the new machine? YES NO
2.2 What is the increase/decrease in profit if Biscayne Bay Kayaks purchases the new machine?
________________
2.3 If Biscayne Bay Kayaks used accelerated depreciation, the book value of the old machine would be $92,880. Would that change your decision? Why or why not?
Old machine
New machine
Batch setup cost
Old--three workers two hours
$ 150.00
New--two workers one hour
$ 50.00
Raw materials per hull
Old--
$ 3,025
New--
$ 3,000
Explanation / Answer
Refer above table
2.2 Profit increase by $38000 per year
2.1 YES, becuase extra cost of asset i.e 250000-100000(salvage value) = 150000 will be recovered in less than 5 years i.e. 150000/38000 = 4 years (Approx.)
Old New Savings per Kayak No of kayaks (a) 2000 2000 Hulls in each batch 25 25 No of Batches (d) 80 80 per Batch Setup cost (e) 150 50 Batch Setup cost (d*e)=f 12000 4000 per Hull Raw Material cost (b) 3025 3000 Hull Raw Material cost (a*b) = c 6050000 6000000 Total cost (f+c)=g 6062000 6004000 -58000 Selling Price (h) 6995 6995 Sales Value (a*h)=i 13990000 13990000 Book Value of Equipment 150000 250000 Life (Yrs) 5 5 Depreciation Straight Line (j) 30000 50000 20000 Profit (i-g-j) 7898000 7936000 38000Related Questions
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