Crone Enterprises uses a word processing 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 $21,000
Accumulated depreciation 6,000 ----
Estimated operating costs 24,000 20,000
Useful life 5 years 5 years
If sold now, the current machine would have a salvage value of $ 5,000. 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.
Should the current machine be replaced? ( Ignore the time value of money ).
Make an incremental analysis for retaining or replacing equipment.
Please provide details for understand the exercise© BrainMass Inc. brainmass.com October 25, 2018, 12:56 am ad1c9bdddf
Incremental Analysis for Decision Making
(a) Prepare the incremental analysis for the decision to make or buy the lamp shades.
We will calculate the cost of making the lamp shades:
Here we will consider all the relevant costs. In this case the relevant costs are variable costs and hence we will not consider fixed costs:
=Material cost+ Labor cost+ Overheads
=$15.2 per unit
This is less than cost of buying, hence the Company should manufacture the lamps.
(b) Should Stahl Inc. buy the lamp shades?
Manufacturing cost is less than cost of buying, hence the Company should manufacture the lamps.
(c) Would the answer be different in (b) if the productive capacity released by not making the lamp shades could be used to produce income of $35,000?
Let us calculate the Net Income by buying in this case:
Net Income= Additional Income - Additional cost
We have taken additional cost of buying as $15.5-$15.2=$.3
Hence one can go for buying in this case as there is a Net income of $26000.