Question

Jerome Harrington manages the Butte plant of Montana Manufacturing (MM). He has been approached by a...

Jerome Harrington manages the Butte plant of Montana Manufacturing (MM). He has been
approached by a representative of Futuristic Engineering regarding the possible replacement
of an important piece of production equipment. While the representative has made some
compelling arguments in favor of replacing the 3-year-old equipment (notably an increase in
efficiency), Harrington is hesitant. He is hoping to be promoted next year to manager of a
larger, more strategic plant in Missoula, and he knows that the net income reported on this
year's Income Statement for Butte will be a key factor in that decision. Data provided are:
* The original equipment was purchased for $1,020,000 three years ago. It had an estimated
useful life of 5 years, with zero salvage value. The current market value is $244,800. MM uses
straight-line depreciation.
*The new equipment will cost $612,000, with a 2-year estimated useful life and a salvage
value of zero.
*The new equipment, being more efficient, will reduce utility costs by $119,000 annually, and
will reduce direct material costs by $102,000 annually.
Required:
(1) Which alternative would Harrington choose, given his personal aspirations? Show your
calculations to justify your answer.
(2) Which alternative is best for the company over the two-year timeframe? Show your
calculations to justify your answer.
(3) EXTRA CREDIT: at what price would Harrington be willing to purchase the new equipment
now?
0 0
Add a comment Improve this question Transcribed image text
Answer #1

Answer

1. Which alternative would Harrington choose, given his personal aspirations? Year 1 Year 2 Movement in net Income Depreciation on old machine forgone Loss on sale of old machine Depreciation on new Machine Reduction in utility costs Reduction in Direct Material costs Decrease (increase) in Net Incom (204,000) (204,000) 0 306,000 (119,000) (119,000) (102,000)(102,000) (119,000) 163,200 306,000 44,200 Since, the acquisition of new machine will result in a loss of $44,200 in first year (being the key factor year), Harrinton should continue with Old equipment only Carying value of old machine The current market value of old equipment Loss on sale of old machine 408,000 $244,800 163,200 2) Which alternative is best for the company over the two-year timeframe? Cash flows Year 1 Year 2 The current market value of old equipment Cost of New Machine Reduction in utility costs Reduction in Direct Material costs (244,800) 612,000 (119,000)(119,000) (102,000 (102,000) 146,200 (221,000) Net Savings over two years (74,800) The decision to acquire the new equipment results in net Cash inflow of $ 74,800 over two years, hence the alternative to acquire the new equipment is beneficial for the company 3. at what price would Harrington be willing to purchase the new equipment Year 1 Movement in net Income Depreciation on old machine forgone Loss on sale of old machine Depreciation on new Machine Reduction in utility costs Reduction in Direct Material costs Decrease (increase) in Net Income (204,000) 163,200 306,000 (119,000 (102,000) 44,200 Harrington e ng to purchase the new equipment at a price which will result in a net gain in first year, which is possible by way of lower depreciation expense Decrease in net Income Life of new asset Equipment cost should be lower by at least Maximum cost of equipment to break-even 44,200 2 years 88,400 523,600 Harrington be willing to purchase the new equipment at a price lower than $523,600, so to result in increase in Net Income in first year

Add a comment
Know the answer?
Add Answer to:
Jerome Harrington manages the Butte plant of Montana Manufacturing (MM). He has been approached by a...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Sean Fitzpatrick manages the Peoria plant of Garcia Manufacturing. A representative of Darien Engineering approaches Fitzpatrick...

    Sean Fitzpatrick manages the Peoria plant of Garcia Manufacturing. A representative of Darien Engineering approaches Fitzpatrick about replacing a large piece of manufacturing equipment that Garcia uses in its process with a more efficient model. While the representative made some compelling arguments in favor of replacing the 3-year-old equipment, Fitzpatrick is hesitant. Fitzpatrick is hoping to be promoted next year to manager of the larger Detroit plant, and he knows that the accrual-basis net operating income of the Peoria plant...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT