GIVEN: Wonder Enterprises uses a special scanner in its operations. Lately sales

Question

GIVEN: Wonder Enterprises uses a special scanner in its operations. Lately sales have increased to the point that it takes extra hours of overtime at night and on weekends to keep up with customer demand. Management is considering purchasing a new faster model of scanner that would eliminate overtime and decrease some of the other operating costs. The following information is available:

CurrentScanner NewScanner

Original purchase cost $100,000 $125,000

Accumulated depreciation $30,000

Estimated annual operating costs (excluding depreciation) $82,000 $64,000

Actual or projected annual depreciation on scanners $10,000 $21,000

Nonmanufacturing operating expenses $42,000 $42,000

Remaining useful life (in years) 5 5

Estimated salvage value at the end of useful life $20,000 $20,000

Estimated current disposal value $58,000

REQUIRED:

Part 1: Compute the gain or loss on the immediate sale of the old scanner.

Part 2: Prepare an incremental analysis report comparing the options of continuing with the current scanner or replacing it.

Part 3: What other factors should be considered before the final decision is reached?

So I found this question on Chegg and am re-posting. Please correct whatever may be wrong.

Part 1: Actual cost = $100,000 Less accumulated depreciation of $30,000 Net book value = $70,000 Sale price = $58,000 Net loss = $12,000 Part 2: Issues Current Replacement Cost Annual operating costs 82,000 64,000 (-) 18000 Depreciation 10,000 21,000 11,000 Nonmanufacturing operating expenses 42,000 42,000 0 Total cost per year 134,000 127,000 (-) 7000 Savings per year = $7000 Savings per five-year period = $35,000 Part 3: Purchase cost of new scanner = $125,000 Disposal value of current scanner = $58,000 Net expense = $125,000 - $58,000 = $67,000 Savings = $35,000 Additional cost of ($67,000 - $35,000 =) $32,000 Wonder Enterprises would save $3000, but would also incur tax expenses that would probably be that or more, so the machine should not yet be replaced.

Explanation / Answer

Part 1 is correct - no change required Part 2 Savings without depriciation as depriciation is not a cash expense Annual operating cost 82000 64000 -18000 Part 3 Purchase of new scanner 125000 Disposal value f current scanner 58000 Net cash outflow 67000 Savings per year ( without depriciation as depriciation is not a cash expense) 18000 Additional cash flow 49000 Wonder Enterprises would save 18000 ( in cash) but would spend additional 49000 in the current year to replace the scanner The other factors to be considered are wheather Wonder Enterprise has surplus cash to invest in the new scanner Secondly what is the oppurtunity cost lost ie how much sales will be affected if the scanner is not replaced The above two factors have to be considered before a decision to replac e the scanner is taken

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