Problem 9-1 Making an Equipment Replacement Decision (LO1 - CC2) Murl Plastics I

Question

Problem 9-1 Making an Equipment Replacement Decision (LO1 - CC2) Murl Plastics Inc. purchased a new machine one year ago at a cost of $33,000. 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: value: 0.00 points Problem 9-1 Making an Equipment Replacement Decision (LO1 CC2) Murl Plastics Inc. purchased a new machine one year ago at a cost of $33,000. 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: Proposed New Machine 49,500 $33,000 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 6 years 5 years 7,700 9,900 $23,100 5,500 27,500 5,500 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 $27,500 5,500 Net loss from disposal $22,000 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 $115,500 per year, and selling and administrative expenses are expected to be $69,300 per year, regardless of which machine is used

Explanation / Answer

1. Statement Showing Summary Income statement for 5 year Detail Keep old Machine Buy New Machine Difference Sales (a) $115,500 $115,500 $0 Less: Expense Annual Operating Cost $23,100 $7,700 $15,400 Depreciation $5,500 $9,900 -$4,400 Selling & Admin Expense $69,300 $69,300 $0 Total Expense (b) $97,900 $86,900 $11,000 Net Income (a-b) $17,600 $28,600 -$11,000 2. Net Advantage of Purchasing New Machine using relevant cost Income as per New Machine $29,700 Income as per Old Old machine $17,600 Ne advantage of new machine $12,100 statement showing income from New machine as per relevant cost Detail Buy New Machine Remark Sales (a) $115,500 Less: Expense Annual Operating Cost $7,700 Depreciation $8,800 Refer W/Note Selling & Admin Expense $69,300 Total Expense (b) $85,800 Net Income (a-b) $29,700 W/Note: Dep. recalculate as per Relevant cost of New Machine Cost of New machine 49500 Less: Salvage value of Old Machine -5500 Relvant cost of new machine will be 44000 Depreciation ( 44000/5 Year) 8800

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