Murl Plastics Inc. purchased a new machine one year ago at a cost of $36,000. Al
ID: 2520428 • Letter: M
Question
Murl Plastics Inc. purchased a new machine one year ago at a cost of $36,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below: Present Machine Proposed New Machine $54,000 Purchase cost new Estimated useful life new Annual operating costs Annual straight-line depreciation Remaining book value Salvage value now Salvage value in five years $36,000 years 5 years $25,200 6,000 30,000 6,000 $8,400 10,800 In trying to decide whether to purchase the new machine, the president has prepared the following analysis Book value of the old machine Less: Salvage value $30 ,000 6,000 Net loss from disposal $24,000 "Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years." Sales are expected to be $126,000 per year, and selling and administrative expenses are expected to be $75,500 per year, regardless of which machine is usedExplanation / Answer
Answer 1 Summary Income statement covering the next five years 5 Years Summary Keep old Machine Buy new machine Difference Sales $630,000.00 $630,000.00 $0.00 Less : Expenses $0.00 Operating Costs $126,000.00 $42,000.00 -$84,000.00 Depreciation $30,000.00 $54,000.00 $24,000.00 Selling and administrative expenses $378,000.00 $378,000.00 $0.00 Loss on sale of old machine $0.00 $24,000.00 $24,000.00 Total Expenses $534,000.00 $498,000.00 -$36,000.00 Net Income $96,000.00 $132,000.00 $36,000.00 Answer 2 The net advantage of purhasing the new machine is $36,000
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