Question

A. Starling Co. is considering disposing of a machine with a book value of $23,600 and estimated remaining life of five years. The old machine can be sold for $5,600. A new high-speed machine can be purchased at a cost of $68,700. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $23,500 to $19,500 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is a(n)? Select the correct answer below. decrease of $43,100 increase of $56,030 decrease of $56,030 increase of $43,100

Answer 1

As per policy, only the first 4 subparts are being answered, please ask the remaining parts seperately.

Question A.

Differential effect

	Old machine	New machine
Annual operating cost	117500	97500
New machine		68700
Old machine salvage		-5600
Total Cost	117500	160600

So answer is a) Decrease of $43100

Question B.

Contribution per unit for this order = Sale price - (Variable Cost - Selling costs saved )

= $ 19 - ($17 - $2) = $19 - $15 = $4 per unit

There would be no additional fixed cost as capacity is already available.

Increase in Net Income = No. of units * Contribution per unit = 1590 * $4 = $ 6360

So answer is d) increase of $6360

Question C.

Total Purchase Cost = 59,000 * $63 = ‭3,717,000‬

Total Cost if make own motherboard= 59000 * ( 30 + 11 + 16) + 81000

= (59,000 * 57) + 81,000 = ‭3,444,000‬

Net decrease in cost if make instead of purchase = 3717000 - 3444000 = 273,000

So answer is b) make, $273,170 increase in profits.

(Note, the options are slightly incorrect so the nearest answer to the correct one has been chosen.)

Question D.

ARR = Average Profit / Average Investment

Average Profit = $160,640

Average Investment = (Initial investment + Salvage Value ) / 2 = ( $553,800 + 0) / 2 = $276,900

ARR = $ 160,640 / $ 276,900 = 58% or 0.58

So answer is b)0.58%

(Note, the options has wrongly mentioned 58% as 0.58%.)

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