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 faster model that would eliminate all of the overtime processing.

Current Machine New Machine
Original purchase cost $15,230 $25,080
Accumulated depreciation $ 6,800 _
Estimated annual operating costs $24,950 $19,560
Useful life 5 years 5 years

If sold now, the current machine would have a salvage value of $8,490. 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. (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 $Johnson Enterprises uses a computer to handle its $Johnson Enterprises uses a computer to handle its $Johnson Enterprises uses a computer to handle its
New machine cost Johnson Enterprises uses a computer to handle its Johnson Enterprises uses a computer to handle its Johnson Enterprises uses a computer to handle its
Salvage value (old) Johnson Enterprises uses a computer to handle its Johnson Enterprises uses a computer to handle its Johnson Enterprises uses a computer to handle its
Total $Johnson Enterprises uses a computer to handle its $Johnson Enterprises uses a computer to handle its $Johnson Enterprises uses a computer to handle its

Should the current machine be replaced?

The current machine should be Johnson Enterprises uses a computer to handle its replacedretained.

Answer 1

By the the new machine would incur $6.620 more in costs.

The decision appropriate would be to stick to using the current machine

Step-by-step explanation:

Incremental analysis for new and old machines

Old Machine New Machine Difference

Purchase cost - $25,080 ($25,080)

Annual operating costs:

($24,950*5)($19,560*5) $124,750 $97,800 $26,950

Salvage value ($8,490) - ($8490)

total costs $116,260 $122,880 ($6,620)

By buying the new machine,Johnson Enterprises would incur $6,620 more in costs,which implies that sticking to the current machine is preferable from an incremental benefit analysis point of view.