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:   PresentMachineProposedNew Machine  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.  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.)

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Asked Nov 17, 2019
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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:

  

  Present
Machine
Proposed
New Machine
  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.

  

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.)

 

          

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Expert Answer

Step 1

The income statement shows the revenues and expenses and hence the  resulting profits or losses arising from the business during any financial period.

Step 2

1 a. The income statement if machinery...

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The new machine is not purchased a Income statement Year 2 Year 1 Year 3 241500 241500 Year 4 Year 5 Total 241500 Sales 241500 241500 1207500 Expenses Operating cost Selling & Administrative expenses Depreciation Total Expenses 48300 48300 48300 48300 48300 241500 144900 144900 144900 144900 724500 144900 11500 204700 1023500 11500 11500 11500 11500 57500 204700 204700 204700 204700 Net Profit (sales-total expenses) 36800 36800 36800 36800 36800 184000

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