Arizona Mechanical recently created a new product, a computer-controlled, laser-

Question

Arizona Mechanical recently created a new product, a computer-controlled, laser-precise lathe, and Ohio Ornamental Metals is considering purchasing one. Ohio’s CFO received the following information from the accounting department regarding the company’s existing lathe and the new Arizona Mechanical lathe. The savings in operating costs offered by the new lathe would mostly derive from reduced waste, reduced labor, and energy cost savings.

Based on financial considerations alone, should Ohio Ornamental Metals purchase the new lathe?
- Select your answer -YesNoItem 1

Show computations to support your answer.

Cost of new machine $ Sales value of old machine Incremental cost of new machine $ Operating cost savings Net advantage of buying new machine $

Explanation / Answer

Yes, O O Metals should purchase the new lathe because there is an advantage of $75,000 in doing so.

Cost of new machine $ 1,600,000 Less: Sales value of old machine        200,000 Incremental cost of new machine   $ 1,400,000 Operating cost savings [ ($450,000 - $155,000) × 5 ] $ 1,475,000 Net advantage of buying new machine ($1,475,000 - $1,400,000) $      75,000

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