Richie Rich Workshop owns a tow truck and the company is known for providing car towing services throughout West Malaysia. The owner of the company, John Doe, recently returned from an overseas business trip where he saw an exhibition of a high technology tow truck. He was so excited with the new high tech tow truck which is more efficient and it comes with a fully computerized system. Upon returning back to Malaysia, he asked his purchasing agent to obtain the price and operating costs data on the high tech tow truck. In addition, he asked the company's accountant to prepare cost data on the existing tow truck The following information are gathered by the company's accountant: Old tow truck New tow truck RM400,000 RM780,000 Purchase price Estimated salvage value 0 0 Estimated useful life 9 years 10 years Depreciation method Straight line Straight line Annual operating costs RM65,000 RM27,000 Variable Fixed RM20,000 RM8,000 Annual revenues are RM1,200,000 and selling and administrative expenses are RM44,500, regardless of which tow truck is used. If the old tow truck is replaced now, Richie Rich Workshop will be able to sell it for RM200,000. Required 1) Prepare an incremental analysis to determine whether the company should retain or replace the old tow truck. 2) Should Richie Rick Company retain or replace the old tow truck? Justify your answer.
Richie Rich Workshop owns a tow truck and the company is known for providing car towing services throughout West Malaysia. The owner of the company, John Doe, recently returned from an overseas business trip where he saw an exhibition of a high technology tow truck. He was so excited with the new high tech tow truck which is more efficient and it comes with a fully computerized system. Upon returning back to Malaysia, he asked his purchasing agent to obtain the price and operating costs data on the high tech tow truck. In addition, he asked the company's accountant to prepare cost data on the existing tow truck The following information are gathered by the company's accountant: Old tow truck New tow truck RM400,000 RM780,000 Purchase price Estimated salvage value 0 0 Estimated useful life 9 years 10 years Depreciation method Straight line Straight line Annual operating costs RM65,000 RM27,000 Variable Fixed RM20,000 RM8,000 Annual revenues are RM1,200,000 and selling and administrative expenses are RM44,500, regardless of which tow truck is used. If the old tow truck is replaced now, Richie Rich Workshop will be able to sell it for RM200,000. Required 1) Prepare an incremental analysis to determine whether the company should retain or replace the old tow truck. 2) Should Richie Rick Company retain or replace the old tow truck? Justify your answer.
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Chapter11: Strategic Cost Management
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Transcribed Image Text:Richie Rich Workshop owns a tow truck and the company is known for providing car
towing services throughout West Malaysia. The owner of the company, John Doe, recently
returned from an overseas business trip where he saw an exhibition of a high technology
tow truck. He was so excited with the new high tech tow truck which is more efficient and
it comes with a fully computerized system. Upon returning back to Malaysia, he asked his
purchasing agent to obtain the price and operating costs data on the high tech tow truck. In
addition, he asked the company's accountant to prepare cost data on the existing tow truck
The following information are gathered by the company's accountant:
Old tow truck New tow truck
RM400,000
RM780,000
Purchase price
Estimated salvage value
0
0
Estimated useful life
9 years
10 years
Depreciation method
Straight line
Straight line
Annual operating costs
RM65,000
RM27,000
Variable
Fixed
RM20,000
RM8,000
Annual revenues are RM1,200,000 and selling and administrative expenses are RM44,500,
regardless of which tow truck is used. If the old tow truck is replaced now, Richie Rich
Workshop will be able to sell it for RM200,000.
Required
1)
Prepare an incremental analysis to determine whether the company should retain or
replace the old tow truck.
2)
Should Richie Rick Company retain or replace the old tow truck? Justify your
answer.
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