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 40 units per day at a cost of $6.10 per unit, whereas other similar machines are producing twice that much. The units sell for $9.30. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $69,660 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

	Old machine	New machine
Production per day	40 units	80 units
Operational days	260	260
Number of years	2	2
Total production	40 x 260 x 2 = 20,800 units	80 x 260 x 2 = 41,600 units
Cost per unit	$6.10	$6.10
Selling price per unit	$9.30	$9.30
Total cost of production	20,800 x 6.10 = 126,880	41,600 x 6.10 = $253,760
Total sales revenue	20,800 x 9.30 = 193,440	41,600 x 9.30 = $386,880

Incremental analysis

	Continue old machine	Replace old machine	Increase/Decrease in income
Total sales revenue	193,440	386,880	193,440
Total cost of production	- 126,880	-253,760	-126,880
Cost of new machine	0	- 69,660	-69,660
Net income	$66,560	$63,460	-$3,100

Replacing machine will result in a net loss of $3,100. Waterways should keep the old machine.

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