Question

Johnson Enterprises uses a 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 faste model that would eliminate all of the overtime processing. Current Machine New Machine $25,100 Original purchase cost Accumulated depreciation Estimated annual operating costs Remaining useful life $14,900 $5,700 $24,700 5 years $19,500 5 years If sold now, the current machine would have a salvage value of $10,100. 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. Prepare an incremental analysis to determine whether the current machine should be replaced. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Retain Machine Replace Machine Net Income Increase (Decrease) Operating costs New machine cost Salvage value (old) Total The current machine should be

Answer 1

Answer:

	Retain Machine	Replace Machine	Net Income Increase (Decrease)
Operating costs	$123,500	$97,500	$26,000
New Machine cost	Nil	$25,100	($25,100)
Salvage value (old)	0	($10,000)	$10,000
Total	$123,500	$11 2,600	$10,900

The current machine should be :

Replaced.

WN 1) Operating costs :

Total Operating Costs = Estimated annual operating cost * Useful Life

> Retain Machine

Operating costs = $24,700 * 5 = $123,500

> Replace Machine

Operating costs = $19,500 * 5 = $97,500

Note :

As there is net increase in income is machine is replaced, the machine must be replaced.