Question

Fruit Tattoos: Budgeting Decisions

Every piece of fruit and vegetables sold in U.S. grocery stores has a small sticker on it. These stickers include food type, origin, and whether it was grown organically. Laser Food is a company based in Spain that makes laser marking machines. These Laser Mark machines tattoo every piece of fruit and vegetable with identifying information. The laser tattoos replace traditional produce stickers. In addition to the required information, laser tattoos on produce can also include individualized information such as harvest date, spoil date, and other custom data.

Produce packing plants currently have machines that put the stickers on each piece of fruit and vegetables. The Laser Mark machines are more expensive than traditional sticker-labeling machines, but can process more pieces of produce per hour than traditional machines.

Fun fact: The paper stickers on fruit are edible, as is the glue backing them.

Initial Question:

Please address the question(s) below. In your post, please support your response (why do you think so?)

What managerial accounting tools could you use to analyze the decision about whether to purchase a Laser Mark machine or to continue to use a traditional sticker machine? Explain.

Answer 1

The firm should use variable costing income statement to see the incremental contribution and net income from adapting Laser Mark machines compared to traditional sticker-labelling machines. The incremental contribution is the increase in number of output * contribution per unit. Contribution is the difference between selling price and variable cost. The incremental depreciation on Laser Mark machine is deducted from contribution to arrive at net income.

The firm should calculate the incremental analysis ( Retain vs Replace) over the total life of the machine. If the incremental analysis is positive the investment is recommended. The existing status quo and the alternative should be compared to see incremental benefits of investment. The benefits are increase in contribution and salvage value of existing and new machine. The cost is the investment in new machine.

The investment in new machine should be analysed based on below capital budgeting methods

· Accounting rate of return- based on net income

· Payback period – The lower the payback period it is good for investment

· Discounted payback period

· Net present value (based on cost of capital)- If NPV is positive the investment should be accepted

· Profitablity index

· Internal rate of return – If IRR is higher than cost of capital the investment should be done on Laser Mark machines