Murl Plastics Inc

Subject:AccountingPrice:4.87 Bought7

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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 Purchase cost new                                   $36,000                                                   $54,000

Estimated useful life new                           6  years                                                    5 years

Annual operating costs                              $25,200                                                    $ 8,400

Annual straight-line depreciation                  6,000                                                        10,800

Remaining book value                                30,000

Salvage value now                                      6,000                                                        

Salvage value in five years                             0                                                                   0

In trying to decide whether to purchase the new machine, the president has prepared the following analysis

Book value of the old machine  $30 ,000

Less: Salvage value                       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 used

1) Prepare a summary income statement covering the next five years assuming the following .

a.  The new machine is not purchased.

b. The  new machine is purchased .

2) compute the net advantage of purchasing the new product using relevant costs.