Question

Decision Making 7-1 (Part 2) (Part Level Submission) Current Designs faces a number of important decisions that require incremental analysis. Current Designs is always working to identify ways to increase efficiency while becoming more environmentally conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the company should consider replacing the current rotomould oven as a way to realize savings from reduced energy consumption. The oven operates on natural gas, using 21,100 therms of natural gas for an entire year. A new, energy-efficient rotomould oven would operate on 18,600 therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $310,000 to purchase a new, energy-efficient rotomould oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $12,400.

(a) Prepare an incremental analysis to determine if Current Designs should purchase the new rotomould oven, assuming that the average price for natural gas over the next 10 years will be $0.55 per therm. (If an amount reduces the net income then enter with a negative sign preceding the number or parenthesis, e.g. -15,000, (15,000). Enter all other amounts as positive and subtract where necessary.) Retain Replace Net Increase (Decrease) Regular operations $ $ $ Cost of the new oven Salvage of old oven $ $ $ Current Designs should not/ should purchase the new rotomould oven.

Answer 1

Answer
	Retain Oven	Replace Oven	Net Income Increase (Decrease)
Variable manufacturing costs	$       116,050	$         102,300	$                                           13,750
New oven cost	$                 -	$         310,000	-$                                         310,000
Proceeds from scrapping old oven	$                 -	-$          12,400	$                                           12,400
Total	$       116,050	$         399,900	-$                                         283,850
Current designs should not purchase the new rotomold oven.
Workings:
	Retain Oven	Replace Oven
Variable manufacturing costs	21100*10*0.55	18600*10*0.55