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:

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.

Transcribed Image Text:

Present Machine Proposed New Machine Purchase cost new $30,000 $45,000 Estimated useful life new 6 years 5 years Annual operating costs $ 7,000 $21,000 Annual straight-line depreciation 5,000 9,000 Remaining book value 25,000 Salvage value now 5,000 Salvage value in five years -0- -0-