Question

 

1) Dinkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $70,000 to $45,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire five years for the new equipment is           .

*a) $10,000 increase (correct answer)

b) $25,000 decrease

c) $10,000 decrease

d) $25,000 increase

2) A business received an offer from an exporter for 10,000 units of product at $13.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available:

Domestic unit sales price	$21
Unit manufacturing costs:
Variable	12
Fixed	5

What is the amount of the gain or loss from acceptance of the offer?

a) $75,000 loss

b) $40,000 gain

*c) $15,000 gain (correct answer)

d) $85,000 gain

Answer 1

Q1.
Answer is a. $10,000 increase
Explanation
Differential analysis
			Keep the	Replace the	Effect on Cost
			old mach.	new mach.
Cost of 5 years		3,50,000	225000.00	-125000.00
Investment in new machine	0	150000.00	150000.00
Salvage value of old machine	0	-15000.00	-15000.00
Increase in cost		3,50,000	360000.00	10000.00
Q2.
Answer is c. $ 15000 Gain
Explanation:
Differential analysis
			Reject	Accept	Net effect on income
Sales revenue		0	135000.00	135000.00
Variable cost		0	-120000.00	-120000.00
Net Increase in income	0	15000.00	15000.00