Aircraft parts maker Toledo Company is considering replacing its metal cutting machine with a newer model. The
Question:
Aircraft parts maker Toledo Company is considering replacing its metal cutting machine with a newer model. The original cost of the old machine was $1,000,000 and the 5-year lifespan is just 3 years old. The new machine is more efficient than the old machine at a cost of $600,000, but the new machine has a 2 year shorter lifespan. The Toledo Company may also sell its old machine for $40,000 worth of disposal. Toledo Corporation uses the straight-line method of depreciation. The data prepared by the management accountant for the existing (old) machine and the spare (new) machine are as follows:
Revenues from aircraft parts ($1.1 million per year) will not be affected by the replacement decision
Details | old machine | New Machine |
actual cost | 1.000.000 $ | 600.000 $ |
useful life | 5 years | 2 years |
current era | 3 years | 0 years |
Remaining useful life | 2 years | 2 years |
Current disposal value (in cash) | 40.000 $ | Not yet won |
Final disposal value (in cash 2 years from now) | 0 $ | 0 $ |
Annual Operating costs (maintenance, energy, repairs, coolants, etc.) | 800.000 $ | 460.000 $ |
a) If Toledo Company sells its old metal cutting machine, what would be the gain or loss from the sale?
Cost of Old Machine |
Accumulated Depreciation (WN) |
Book Value |
Sales revenues |
Loss in Sales |
(b) Prepare a 2-year summary income statement for each of the following assumptions: Toledo company retains old machine, Toledo company buys new machine. (please show calculations of each step in the handout). - I made the table format myself, if you think something needs to be added or changed then do it.
Details | Hide the machines (a) | change machine (b) | Fark (c)= (a)-(b) |
Revenues (2 years) | 220.00.000 $ | 220.00.000 $ | - |
Minus: Cash Operating cost | |||
for new machines | |||
for old machines | |||
Depreciation | |||
Loss related to disposal of the machine | |||
New machine cost | |||
Disposal value of the old machine | |||
Total amount | |||
Net income |
(c) Using incremental analysis, determine whether the old clipper should be kept or replaced?
Details | Kale | relocate | Net Profit Increase (Decrease) |
Cash Operating Cost | |||
Current disposal value of the old machine | - | ||
New machine cost | - | ||
Total Related Cost |
Cost Management Measuring Monitoring And Motivating Performance
ISBN: 9781118168875
2nd Canadian Edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang Hsuan Chen, Gail Cook