R Company bought a machine for $720,000 two years ago. The machine uses straight-line method, with a useful life of 12 years and no salvage value. The manager now considers an automated nmachine, which can replace the current machine, with the purchase of $900,000, but it can save $120,000 cost per year and is assumed to be used for 10 years with no salvage value. The old machine can be sold for $240,000. The manager gave the analysis below: Cost that new machine can save: $1,200,000 Cost of new machine Purchase cost $900,000 Loss on disposal of old machine 360,000 1,260,000 $ (60,000) If the company continues using the old machine, its manufactuing cost is $324,000 per year. The manager therefore decides not to change the machine. If they use the new machine, sales will remain $600,000 every year, and the expenses for sales and management will be $100,000. Give comments on the manager’s analysis. Prepare accumulated income statements for 10 years, with the conditions of changing and not changing the machine. Using the concept of relevant cost, decide whether to renew the machine or not.
R Company bought a machine for $720,000 two years ago. The machine uses straight-line method, with a useful life of 12 years and no salvage value. The manager now considers an automated nmachine, which can replace the current machine, with the purchase of $900,000, but it can save $120,000 cost per year and is assumed to be used for 10 years with no salvage value. The old machine can be sold for $240,000. The manager gave the analysis below:
Cost that new machine can save: $1,200,000
Cost of new machine
Purchase cost $900,000
Loss on disposal of old machine 360,000 1,260,000
$ (60,000)
If the company continues using the old machine, its manufactuing cost is $324,000 per year.
The manager therefore decides not to change the machine. If they use the new machine, sales will remain $600,000 every year, and the expenses for sales and management will be $100,000.
- Give comments on the manager’s analysis.
- Prepare accumulated income statements for 10 years, with the conditions of changing and not changing the machine.
- Using the concept of relevant cost, decide whether to renew the machine or not.
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