32. A year ago, Crunchy Cola Corporation bought a stamping machine to make the c

Question

32. A year ago, Crunchy Cola Corporation bought a stamping machine to make the cans for its cola. The cost of the machine was $60,000. The machine has a useful life of 5 years and a salvage value of zero at the end of those five years. Annual depreciation on the machine is $12,000. One year of depreciation has been recorded. The variable manufacturing cost of producing the cans is $0.05 per can. The only fixed manufacturing cost is the annual depreciation of $12,000 on the stamping machine. Crunchy needs 200,000 cans annually. Dagmar Stamping Company recently gave Crunchy an offer to supply all of its can needs for the next four years at $0.07 per can. If Crunchy buys from Dagmar, the stamping machine would not be needed and would be sold for $35,000. If Crunchy buys from Dagmar, what will be the total dollar increase or decrease in income for the next four years?
A. $16,000 decrease
B. $19,000 increase
C. $29,000 decrease
D. $32,000 increase

Explanation / Answer

Current Situation Variable Cost Per Year = 200,000 * 0.05 = 10,000 Fixed Cost Per Year = 12,000 Total Cost Per Year = 22,000 Total Cost For 4 Years = 22,000 * 4 = 88,000 This means our net income over 4 years is currently (X - 88,000) Alternative Sell Machine Now; Carrying Value = 60,000 - 12,000 = 48,000 Price = 35,000 Gain/Loss on Sale = 35,000 - 48,000 = -13,000 New Cost Structure; Variable Cost Per Year = 200,000 * 0.07 = 14,000 No Fixed Costs Total Cost over 4 Years = 14,000 * 4 = 56,000 Total Cost including Loss in First Year = 56,000 + 13,000 = 69,000 Under the alternative, our net income over 4 years is (X - 69,000) This is clearly better than our current situation by 19,000 (Choice B)

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