The Plastic Lumber Company is considering whether s ould replace an extrusion ma

Question

The Plastic Lumber Company is considering whether s ould replace an extrusion machine. The new machine will produce 40% more finished umber than the old machine. The increase in production will cause xed selling costs o increase. but variable selling costs will not increase. The new machine will require installation by an engineering firm; the old machine had required a similar installation. If the new machine is purchased, the old machine can be sold as scrap. The old machine requires frequent repairs and maintenance to keep it running, while the new machine will require maintenance once a year. The new machine will be paid for by signing a notes payable with the bank that will cover the cost of the new machine. The Plastic Lumber Company will pay interest on the notes payable. The notes payable that was used to pay for the old machine was fully paid off last year In the following chart, indicate whether each of the costs described would be relevant or not to Plastic Lumber Company's decision about whether to purchase the new extrusion machine or to keep using the old extrusion machine. a. Cost of new machine b. Cost of old machine c. Added profits from increase in production from new machine d. Fixed selling costs e. Variable selling cost f. Scrap value of old machine g. Interest expense on new machine h. Interest expense on old machine i. Book value of old machine . Maintenance cost of new machine k. Repairs and maintenance costs of old machine (future) l. Installation cost of new machine m. Installation costs of old machine n. Salary of company's CEO o. Accumulated depreclation on old machine Click to select your answer(s).

Explanation / Answer

SR. No. Particulars Relevant/ Not Relevant Remarks a Cost of new Machine Relevant Cash Outflow so releavant b Cost of old Machine Not Relevant Sunk Cost so not relevant c Added Profits from increase in production from new machiene Relevant Increase in profit so relevant d Fixed Selling Cost Relevant Because it will increase e Variable Selling Expenses Not Relevant Because it will be constant f Scrap Value of old machiene Relevant Because it will reduce the cost of new machiene g Interest Expenses of new Machiene Relevant Relevant for Comparison h Interest Expenses of Old Machiene Relevant Relevant for Comparison i Book Value of old Machine Not Relevant Sunk Cost so not relevant j Maintenance cost of new machiene Relevant Future outflow so relevant k Repair and Maintenance cost of old machiene (future) Relevant Future outflow so relevant l Installation cost ofnew machiene Relevant Relevant becase cash outflow m Installation cost of Old machiene Not Relevant Sunk Cost so not relevant n Salary of the company CEO Not Relevant No Changes so not relevant o Accumulated depreciation of old machiene Not Relevant Sunk Cost so not relevant

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