After consultation with the production manager, Mr Jordan is considering the purchase of a single new machine
Question:
After consultation with the production manager, Mr Jordan is considering the purchase of a single new machine that will replace one the existing two machines. The new machine uses new environmentally friendly technology and will cut scrap and rework rates (the cost of remedying manufacturing problems) resulting in a substantial savings in materials and labour costs. A production manager has gathered the following information concerning the old machine and the proposed new one.
Old machine | Proposed new machine | |||||
Original cost | 100,000 | List price new | 250,000 | |||
Remaining book value | 80,000 | Expected life | 4 years | |||
Remaining life | 4 years | Disposal value in four years | 0 | |||
Disposal value now | 30,000 | Annual variable operating expenses | 215,000 | |||
Disposal value in four years | 0 | Annual revenue from sales | 450,000 | |||
Annual variable operating expenses | 230,000 | |||||
Annual revenue from sales | 400,000 |
During the initial discussion about the proposal to replace the machine, the first response, from the Board of Directors was to reject purchase of the new machine. By way of explanation, the Board emphasised that the company had already made an investment of 100,000 in the old machine and as the remaining life of the machine was four years the original cost would be wasted. In fact, the company would make a loss of 50,000 if the machine was sold now for 30,000.
Calculate the difference in profit over the next four years between keeping and replacing the old machine.
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr