Question

1. Michelin is considering going "lights out" in the mixing area of the business that operates 24/7. Currently, personnel with a loaded cost of $600,000 per year are used to manually weigh real rubber, synthetic rubber, carbon black, oils, and other components prior to manual insertion in a Banbary mixer that provides a homogeneous blend of rubber for making tires. New technology is available that has the reliability and consistency desired to equal or ex- ceed the quality of blend now achieved manually. It requires an investment of $3.75 million, with $80,000 per year operational costs and will replace all of the manual effort described above. inonim a. How are the current manual expenditures handled for tax purposes? b. How would the new technology expenditures be handled for tax purposes?

Answer 1

ANSWER

As per the given question,

a. If $600,000 per year is used as manual expenses, then it is written off from taxable income every year before calculating tax

b. If new machine is installed in the company then the first cost of $3.75 is not written off in a single year, it is written off in parts over a period of time as depreciation of the machinery. However, apart from depreciation, the operational costs of $80,000 are also deducted from taxable income every year.

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