Question

Murl Plastics Inc. purchased a new machine one year ago at a cost of $39,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below:

  

	Present Machine			Proposed New Machine
Purchase cost new	$	39,000		$	58,500
Estimated useful life new		6	years		5	years
Annual operating costs	$	27,300		$	9,100
Annual straight-line depreciation		6,500			11,700
Remaining book value		32,500			—
Salvage value now		6,500			—
Salvage value in five years		0			0

  

In trying to decide whether to purchase the new machine, the president has prepared the following analysis:

  

Book value of the old machine	$	32,500
Less: Salvage value		6,500
Net loss from disposal	$	26,000

  

“Even though the new machine looks good,” said the president, “we can’t get rid of that old machine if it means taking a huge loss on it. We’ll have to use the old machine for at least a few more years.”

  

Sales are expected to be $136,500 per year, and selling and administrative expenses are expected to be $81,900 per year, regardless of which machine is used.

  

Required:

1.	Prepare a summary income statement covering the next five years, assuming the following:

  

a.	The new machine is not purchased.
b.	The new machine is purchased.
	(Leave no cells blank - be certain to enter "0" wherever required.)

      

2.	Compute the net advantage of purchasing the new product using relevant costs.

  

     

Answer 1

ANSWER

1. Income Statement (The new machine is not purchased)

Year	1	2	3	4	5
Sales revenue	136500	136500	136500	136500	136500
Less Operating cost	-27300	-27300	-27300	-27300	-27300
Less Depreciation	-6500	-6500	-6500	-6500	-6500
Less Selling and administrative expenses	-81900	-81900	-81900	-81900	-81900
Net Income	20800	20800	20800	20800	20800

Income Statement (The new machine is purchased)

Year	1	2	3	4	5
Sales Revenue	136500	136500	136500	136500	136500
Less Operating cost	-9100	-9100	-9100	-9100	-9100
Less: Loss on sale of old machine	-26000
Less: Depreciation	-11700	-11700	-11700	-11700	-11700
Less: Selling and administrative expenses	-81900	-81900	-81900	-81900	-81900
Net income	7800	33800	33800	33800	33800

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