Question

Waterways is considering the replacement of an antiquated machine that has been slowing down production because of breakdowns and added maintenance. The operations manager estimates that this machine still has 2 more years of possible use. The machine produces an average of 50 units per day at a cost of $6.10 per unit, whereas other similar machines are producing twice that much. The units sell for $8.80. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $73,000 and have a 2-year life.

Given the information above, what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns?

Replacing the machine will result in a                                                           net lossnet profit of $  . Waterways                                                           shouldshould not keep the old machine.

Answer 1

Replacing the machine will result in a net loss of $2,800. Waterways should keep the old machine.

Explanation:

Replacement Analysis
	Old Machine	New Machine
Sales Revenue (see below- note-1)	$228,800	$457,600
Less: Cost of production (see below-note-2)	($158,600)	($317,200)
Less: Cost of Machine		($73,000)
Net income (loss)	$70,200	$67,400

Increase (decrease) in income after replacement = (2,800) [$70,200-$67,400]

Note-1)

Sales Revenue (Old Machine) = 260 days * 2 years * 50 units per day *$8.8

Sales Revenue (Old Machine) = $228,800

Sales Revenue (New Machine) = 260 days * 2 years * 50 units per day * 2 *$8.8

Sales Revenue (New Machine) = $457,600

Note-2)

Cost of production (Old Machine) = 260 days * 2 years * 50 units per day *$6.10

Cost of production (Old Machine) = $158,600

Cost of production (New Machine) = 260 days * 2 years * 50 units per day * 2 *$6.10

Cost of production (New Machine) = $317,200