question archive Murl Plastics Inc
Murl Plastics Inc
Subject:AccountingPrice:4.87 Bought7
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.
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Answers:
| 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 | ||||
