Question

Question 2

Kween Bee Products Ltd is the supplier of honey to Arokya Bee. Kween Bee is in the midst of replacing its machinery that produces the honey supplied to Arokya Bee.

The machinery is depreciated at the rate of 25% per annum using the reducing balance method. It currently has a carrying amount of $85,000.

The directors are considering replacing all the old machinery with new machinery costing $160,000. The new machinery, if purchased, would cause direct labor costs to fall by $14,000 a year.


REQUIRED:

Advise the directors of Kween Bee Ltd whether or not they should proceed with the purchase of the new machinery. Justify your answer and include the impacts of Kween Bee’s decision to replace the machinery on Arokya Bee’s business.

Answer 1

The directors of Kween Bee Ltd should proceed with the purchase of the new machinery by replacing all the old machinery with new machinery as it is profitable to KWeen Bee ltd as follows;-

Particular	Calculation	Amout
Additional depreciation to be claimed	160000*25%	$          40,000
Labour costs to be saved	given	$          14,000
Total benefit		$          54,000
Less: Depreciation lost on old machinery	85000*25%	$          21,250
Net benefit to company		$          32,750
Extra spendings	160000-85000	$          75,000
Years to recover spendings	75000/32750	2.290076336

Therefore, by the avove analysis it can be said that if the supply to Arokya Bee’s continue for atleast 2 years and 4 months then only replacing the old machinery with the new machinery will be profitable, otherwise not.

The impacts of Kween Bee’s decision to replace the machinery on Arokya Bee’s business will be that they will get better quality of honey and they can place more orders due to low laboour costs to Kween, it would be manageable to supply more orders within the time limit.