Concept explainers
Use incremental analysis for retaining or replacing equipment decision.
(LO 5), AN
Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.
Current Machine | New Machine | |
Original purchase cost | $15,000 | $25,000 |
$ 6,000 | — | |
Estimated annual operating costs | $25,000 | $20,000 |
Remaining useful life | 5 years | 5 years |
If sold now. the current machine would have a salvage value of $6.000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.
Instructions
Should the current machine be replaced?
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- Current Attempt in Progress Kingbird Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra three hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing. Data for the two computers are as follows: Current Computer New Computer Original purchase cost $14,500 $25,400 Accumulated depreciation $6,300 $0 Estimated operating costs Useful life $23,700 $19,600 5 years 5 years If sold now, the current computer would have a salvage value of $10,500. If it is used for the remainder of its useful life, the current computer would have zero salvage value. The new computer is expected to have zero salvage value after five years. Determine whether the current computer should be replaced. (Ignore the time value of money.) Current computer should be The incremental analysis shows that net…arrow_forwardJohnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing. Original purchase cost. Accumulated depreciation Estimated annual operating costs Remaining useful life Current Machine $15,100 $6,500 $24,600 5 years New Machine $25,400 $20,000 5 years If sold now, the current machine would have a salvage value of $13,400. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years. Prepare an incremental analysis to determine whether the current machine should be replaced. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column,…arrow_forwardQ2. Image Solutions operates a printing service for customers with digital cameras. The current service, which requires employees to download photos from customer cameras, has monthly operating costs of $7,000 plus $0.40 per photo printed. Management is evaluating the desirability of acquiring a machine that will allow customers to download and make prints without employee assistance. If the machine is acquired, the monthly fixed costs will increase to $13,000 and the variable costs of printing a photo will decline to $0.08 per photo. (a) Determine the total costs of printing 20,000 and 50,000 photos per month. Units Current Process Proposed Process 20,000 50,000 (b) Determine the monthly volume at which the proposed process becomes preferable to the current process. unitsarrow_forward
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