Question

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 20,100 therms of natural gas for an entire year. A new, energy-efficient rotomould oven would operate on 17,700 therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $295,000 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 $11,800.

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/ should not purchase the new rotomould oven.

Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.90 per therm, determine how that might change your conclusion in part (a). (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/should not purchase the new rotomould oven.

Answer 1

Requirement 1: Compute increase or decrease in net income as follows

Particulars	Retain	Replace	Net Income Increase / (Decrease)
Regular operations	$110,550	$97,350	$13,200
Cost of the new oven	$0	$295,000	($295,000)
Salvage value of old oven	$0	($11,800)	$11,800
Total costs over 10 years	$110,550	$380,550	($270,000)

The company should not purchase the new rotomould oven.

Notes: Compute total cost of regular operations as follows

Particulars	Retain	Replace
Natural gas consumption	20,100	17,700
× Average price per therm	$0.55	$0.55
Total amounts	$11,055	$9,735
× Expected useful life	10	10
Total cost	$110,550	$97,350

Requirement 2: Compute increase or decrease in net income as follows

Particulars	Retain	Replace	Net Income Increase / (Decrease)
Regular operations	$180,900	$159,300	$21,600
Cost of the new oven	$0	$295,000	($295,000)
Salvage value of old oven	$0	($11,800)	$11,800
Total costs over 10 years	$180,900	$442,500	($261,600)

The company should not purchase the new rotomould oven.

Notes: Compute total cost of regular operations as follows

Particulars	Retain	Replace
Natural gas consumption	20,100	17,700
× Average price per therm	$0.90	$0.90
Total amounts	$18,090	$15,930
× Expected useful life	10	10
Total cost	$180,900	$159,300