Murl Plastics Inc. purchased a new machine one year ago at a cost of $30,000. Although the

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Murl Plastics Inc. purchased a new machine one year ago at a cost of $30,000. 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:

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In trying to decide whether to purchase the new machine, the president has prepared the following analysis:

Book value of the old machine .................................... $25,000Less: Salvage value ............................................................ 5,000Net loss from disposal .................................................. $20,000

?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 $100,000 per year, and selling and administrative expenses are expected to be $63,000 per year, regardless of which machine is used.

Required:

1. Prepare a summary income statement covering the next five years, assuming:

a. The new machine is not purchased.

b. The new machine is purchased.

2. Determine the desirability of purchasing the new machine using only relevant costs in your analysis.

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Related Book For  book-img-for-question

Introduction to Managerial Accounting

ISBN: 978-1259105708

5th Canadian edition

Authors: Peter C. Brewer, Ray H. Garrison, Eric Noreen, Suresh Kalagnanam, Ganesh Vaidyanathan

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