question archive Problem Set Don Williams is General manager of Carib Systems who received a proposal to replace the Version 1 with Version 2 Point of Sales (POS) equipment at the company
Problem Set Don Williams is General manager of Carib Systems who received a proposal to replace the Version 1 with Version 2 Point of Sales (POS) equipment at the company
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Problem Set Don Williams is General manager of Carib Systems who received a proposal to replace the Version 1 with Version 2 Point of Sales (POS) equipment at the company. Williams collects data about the proposal on Version 1 and Version 2 as follows: Version 1 POS Version 2 POS Original cost $425,000 $170,000 Useful life 5 years 3 years Current age 2 years O years 3 years 3 years Remaining useful life Accumulated depreciation $195,000 Current book value $230,000 Not purchased yet Not purchased yet Not purchased yet $120,000 Current disposal value (in cash) Final disposal value (in cash 3 years from now) Annual POS cash operating costs $0 $0 $60,000 $20,000 Annual revenues $1,250,000 $1,250,000 Annual non POS related operating costs $920,000 $920,000 Required: As the Management Accountant: 1. Compare the costs of Version 1 POS and Version 2 POS. Consider the cumulative results for the three years together, ignoring the time value of money and income taxes. (15 Marks) 2. Advise Mr. Williams on the factors that determine whether a revenue or cost item is relevant for management at Carib Systems and indicate whether he should accept the proposal.
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1.cost for 3 years.
| Particulars | Version 1 pos | version 2 pos |
| Purchase cost | 170000 | |
| Sale of old machine | (120000) | |
| Annual operating cost | 180000 | 60000 |
| (60000*3years) | (20000*3) | |
| Total cost | 180000 | 110000 |
2. Whether cost is relevant or not depend on the kind of cost. Please refer the following picture
A. purchase cost of existing machine is not relevant because it is already incurred and hence a sunk cost. Depreciation is non cash expense and so irrelevant.
B. if version 2 pos is bought, then version 1pos will be disposed and therefore proceeds from disposal is reduced from cost of version 2 pos.
C. Annual revenues and annual non- pos operating costs remain same under both alternatives. Incremental cost is zero.Hence they are irrelevant in decision making.
Williams should accept the proposal because buying version 2 pos will lead to savings in cost of 70000 (180000-110000)
please see the attached file for the complete solution.
