Franklin became an environmentalist in college. He was always looking for ways f

Question

Franklin became an environmentalist in college. He was always looking for ways for the company to reduce its carbon footprint. He usually corralled the controller, Luca around 5:00 PM a couple times a week. Luca had very little interest hearing about another tree hugging idea from “Freaky Franklin” as he referred to him. However, yesterday Luca actually thought Franklin might have a good idea.

Franklin suggested Los Santos consider replacing the coal burning central heating system in their New Jersey manufacturing
facility with a fusion powered unit. Franklin’s analysis indicated, the current heating unit used 17,000 tons of coal each year and with a net book value of zero, is fully depreciated.

The new fusion fired system, per Franklin’s analysis, would use about 15,000 fusion pills for an entire year. Franklin had already received price quotes from fusion system suppliers and determined it would cost
approximately $250,000 to purchase. Franklin’s analysis determined that the expected useful life of the new fusion unit would be 10 years, and it would have no salvage value at the end of its useful life. Los Santos will likely be able to sell the current coal burning unit for $10,000.

Since almost no one in the United States used coal to heat their facility any more the price had plummeted and was just per half ton $0.325. When one of Buster A. Move’s high tech startups perfected fusion technology, fusion pills were immediately in high demand --- each pill is double the of cost of a half-ton of coal.

REQUIREMENT
1. Luca, on his way to go night fishing, asked your group to stay late and prepare an incremental analysis to determine the impact
on Los Santos’ operating income during the first year should the new fusion unit be purchased.
2. Assume the price of fusion pills was $0.85 each, what would the first year impact be on operating income should the fusion unit be purchased

Explanation / Answer

1. Impact on First year Operating Income Coal Fusion Increment 17000tons or 17000*2=34000 half-tons*0.325 11050 15000 fusion pills *(2*0.325) 9750 -1300 Annual depreciation (250000-10000(Sale price of coal unit)/10 ie. 240000/10 0 24000 24000 Total impact on 1st year Opertaing Income 22700 2 Coal Fusion Increment 17000tons or 17000*2=34000 half-tons*0.325 11050 15000 fusion pills *0.85 12750 1700 Annual depreciation (250000-10000(Sale price of coal unit)/10 ie. 240000/10 0 24000 24000 Total impact on 1st year Opertaing Income 25700

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