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 faster model that would eliminate all of the overtime processing. Current Machine New Machine Original purchase cost $14,700 $25,500 Accumulated depreciation $6,500 _ Estimated annual operating costs $24,900 $19,800 Remaining useful life 5 years 5 years If sold now, the current machine would have a salvage value of $10,400. 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.

Operating cost of retain machine is calculated by multiplying the estimated operating costs of old machine with the number of years. ($24900 multiply with 5 years = $124500).

Operating cost of replace machine is calculated by multiplying with the estimated operating costs of new machine with the number of years ($19800 multiply with 5 years = $99000).

CONCLUSION: using the old machine or the current machine costs higher than the purchasing of the new machine. Therefore, it is advised to replace the old machine with a new machine to save the cost.

tallinn tallinn · Answer 2 · 2022-03-28T10:25:57+02:00

The total Net income is $10400 it is recommended to replace the old machine with a new machine to preserve the cost.

Calculation of Net income:

The following is incremental analysis are :

Particulars Retain machine Replace machine Net income

Increase / (Decrease)

Operating costs $124500 $99000 25500

($124500 - $99000)

New machine costs - 25500 (25500)

Salvage value (Old) 10400 10400

Total $124500 $114100 $10400

Working notes:

The operating cost of the retaining machine is calculated by reproducing the calculated operating costs of the old machine by the number of years. ($24900 multiply with 5 years = $124500).

The operating cost of substituting the machine is calculated by multiplying the calculated operating costs of the new machine by the number of years ($19800 multiplied by 5 years = $99000).

CONCLUSION: When using the old machine or the current machine costs are higher than the purchase of the new machine. Thus, it is advised to replace the old machine with a new machine to save the cost.

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