What is the amount of gain or loss from acceptance of the offer? $65,000 gain $5

ID: 2485702 • Letter: W

Question

What is the amount of gain or loss from acceptance of the offer? $65,000 gain $50,000 loss $30,000 loss $20,000 loss Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The total net differential increase or decrease in cost for the new equipment for the entire five years is: decrease of $11,000 decrease of $15,000 increase of $11,000 increase of $15,000 Assume that Penguin Co. is considering disposing of equipment that cost $50,000 and has $40, of accumulated depreciation to date. Penguin Co. can sell the equipment through a broker for $25,000 less 5% commission. Alternatively, Teal Co. has offered to lease the equipment for five years for a total of S48.750. Penguin will incur repair, insurance, and property tax expenses estimated at $10,000. At Iease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is: $15,000 $5,000 $25,000 $12,500 Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $.60 of fixed costs. If 4,000 units of the re normally purchased each year but could he manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it? $12,000 cost decrease $4,000 cost increase $20,000 cost decrease $1,600 cost increase

Explanation / Answer

A22)old machine book value is a sunk cost

Sale value of old machine

1,500

Purchase price of new machine

(25,000)

Saving in variable cost for five years

(2500*5)

12,500

Net decrease in income

$11,000

Answer option (a)

Q23)Sale price of Equipment less commission is 25,000@95% = $23,750

Lease option – lease rent $48,750 less cost $10,000 = $38,750

Hence differential income will be $38,750 - $23,750 = $15,000

Hence option (a)

Q24)purchase price was $8

Cost of manufacturing = $9 - $.60 fixed cost = $8.40

Differential cost = ( $8.40 - $8.00) 4,000

=$1,600 cost increase

Option (d)