Change Industries has 2,500 defective units of product that have already cost $1

Question

Change Industries has 2,500 defective units of product that have already cost $14.50 each to produce. A slavage company will purchase the defective units as they are for $5.50 each. Chang's production manager reports that the defects can be corrected for $5.50 per unit, enabling them to be sold at their regular market price of $22.00. The incremental income or loss on reworking the units is: $27.500 loss. $27,500 income. $13,750 loss, $41, 250 income. A company is planning to purchase a machine that will cost $30,600, have a six - year life, and be depreciated over at three - year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly thoughout each year. A projected income statement for each year of the assets life appears below. What is the payback period for this machine 3.59 year. 3.67 year. 1.41 year. 6.00 year.

Explanation / Answer

making and hence is not relevant.

15. No of units                                                                                                           2,500.00 Cost already incurred per unit= Salvage Value=                                                                                                                 14.50 Cost to be incurred to correct                                                                                                                   5.50 a Incremental Income on correcting the units and selling it Selling Price per unit                                                                                                                 22.00 Less: Incremental cost                                                                                                                   5.50 Profit per unit                                                                                                                 16.50 Incremental Income                                                                                                         41,250.00 b Income if units had been sold without correction Selling price per unit                                                                                                                   5.50 No:of units                                                                                                           2,500.00 Total sales price                                                                                                         13,750.00 Incremental income= a-b                                                                                                         27,500.00 Note: The initial cost has not been taken into consideration as the cost is already incurred and plays no role in decision

making and hence is not relevant.

16 Net Income from the machine                                                                                                         16,660.00 Add: Depreciation before tax (5100*(1-0.30)=                                                                                                           3,570.00 Cash flow every year                                                                                                         20,230.00 Initial cost                                                                                                         30,600.00 Payback period= Initial cost/ Cash flow every year                                                                                                                   1.51

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