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# Incremental Analysis and Decision Making

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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

\$2.19

## 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:
=5+6+70%*6
=\$15.2 per unit
This is less than cost of buying, hence the Company should manufacture the lamps.