Murl Plastics Inc. purchased a new machine one year ago at a cost of $69,000. Although the machine operates well, the president of Murl Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below:
|Purchase cost new||$||69,000||$||103,500|
|Estimated useful life new||6||years||5||years|
|Annual operating costs||$||48,300||$||16,100|
|Annual straight-line depreciation||11,500||20,700|
|Remaining book value||57,500||—|
|Salvage value now||11,500||—|
|Salvage value in five years||0||0|
|In trying to decide whether to purchase the new machine, the president has prepared the following analysis:|
|Book value of the old machine||$||57,500|
|Less: Salvage value||11,500|
|Net loss from disposal||$||46,000|
“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 $241,500 per year, and selling and administrative expenses are expected to be $144,900 per year, regardless of which machine is used.
|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.)
The income statement shows the revenues and expenses and hence the resulting profits or losses arising from the business during any financial period.
1 a. The income statement if machinery...
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