Exercise 20-14 Johnson Enterprises uses a computer to handle its sales invoices.
ID: 2540537 • Letter: E
Question
Exercise 20-14
Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
If sold now, the current machine would have a salvage value of $10,100. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.
Should the current machine be replaced? (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
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Problem 20-1A
Stahl Inc. produces three separate products from a common process costing $100,200. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. Shown below are cost and selling price data for a recent period.Sales Value
at Split-Off
Point Cost to
Process
Further Sales Value
after Further
Processing Product 10 $59,900 $100,000 $190,200 Product 12 15,500 30,900 34,700 Product 14 56,000 150,900 216,000
Explanation / Answer
Question 1)
a) Net income if all products are sold at the split-off point is calculated as follows:-
Total Sales value at split off point = Product 10+Product 12+Product 14
= $59,900+$15,500+$56,000 = $131,400
Total common cost = $100,200
Net Income = Total Sales value at split off point - Total common cost
= $131,400 - $100,200 = $31,200
b) Net income if all products are sold after further processing is calculated as follows:-
Total Sales value after further processing = Product 10+Product 12+Product 14
= $190,200+$34,700+$216,000 = $440,900
Total common cost = $100,200
Total cost to process further = Product 10+Product 12+Product 14
= $100,000+$30,900+$150,900 = $281,800
Net Income = Total Sales value after further processing-Common cost-Cost to process further
= $440,900 - $100,200 - $281,800 = $58,900
c) Incremental Profit/(loss) = Incremental sales value from further processing - Further processing cost
Calculation of Incremental profit/(loss) for each product (Amount in $)
Product Incremental Profit/(Loss) Decision Product 10 [($190,200 - $59,900) - $100,000] = 30,300 Should be processed further Product 12 [($34,700 - $15,500) - $30,900] = (11,700) Should be sold at the split-off point Product 14 [($216,000 - $56,000) - $150,900] = 9,100 Should be processed furtherRelated Questions
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