A company manufactures and sells high-end speakers. In 20x1, the production mana

Question

A company manufactures and sells high-end speakers. In 20x1, the production manager installed a new piece of production equipment. The equipment cost $5,000. It had a useful life of 5 years and zero salvage value. Estimated annual repair and maintenance costs for the production equipment is $900 and annual energy-usage costs are $3,400. The equipment can be sold today for $1,900. Recently, the company hired efficiency consultants to evaluate the company’s production processes. Among their recommendations was that the company replace the production equipment mentioned above with a newer energy efficient model. The energy efficient production equipment costs $6,000. It has an estimated useful life of 4 years and its salvage value is $1,000. Annual repairs and maintenance costs for the energy efficient model is $900 and estimated annual energy-usage costs are $1,800. 1. Prepare an analysis to determine whether the production manager should keep the one-year old production equipment or replace it with the new energy efficient model. Please show your work. 2. One concern expressed by the production manager is the effect of replacing the one year old production equipment on the current year financial income. He believes the new energy efficient model will reduce financial accounting income more than the current model. Do you agree with the production manager? Please provide analysis in support of your answer.

Explanation / Answer

Answer: Requirement 1 Analysis to determine whether the production manager should keep the one-year old production equipment or replace it with the new energy efficient model Saving in annual repair and maintenance cost $                          -   (900-900)*4 Saving in annual energy-usage cost $             6,400.00 (3400-1800)*4 Salvage value $             1,000.00 Total saving $             7,400.00 Less: Cost of new machine $             4,100.00 ($6000-1900) Net saving in cost $             3,300.00 Therefore, the existing machine should be replaced. Requirement 2 No, the concern expressed by the production manager is the effect of replacing the one year old production equipment on the current year financial income is not correct as the new energy efficient model will not reduce financial accounting income more than the current model.

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