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In: Accounting

Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good...

Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.

Current Machine New Machine
Original purchase cost $14,900 $24,600
Accumulated depreciation $6,700 _     
Estimated annual operating costs $24,500 $19,500
Remaining useful life 5 years 5 years


If sold now, the current machine would have a salvage value of $10,300. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.

Prepare an incremental analysis to determine whether the current machine should be replaced. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Retain
Machine
Replace
Machine
Net Income
Increase
(Decrease)
Operating costs $ $ $
New machine cost
Salvage value (old)
   Total $ $ $
The current machine should be

replacedretained

.
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Solutions

Expert Solution

Machine should be replaced so that costs can be reduced and profit can be increased  
Statement showing computations
Particulars Retain Machine Replace Machine Net income Inc(Dec)
Operating costs
Retain =24500*5
Replace =19500*5
              122,500.00                        97,500.00                              25,000.00
New Machine Cost                        24,600.00                           (24,600.00)
Salvage Value Old                        (10,300.00) 10,300.00
Total Costs for 5 years               122,500.00                     111,800.00                              10,700.00

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