Question

In a business setting, we are often asked to write a memo to communicate with internal and external professionals. To further advance your learning of memo communication, this written case requests that you prepare a memo to communicate within the company.

Background:

As the senior accountant at Jackson Quality Sportswear (JQS), which manufactures sport attire for men, women, youth, and children, you are often asked to prepare various financial analysis necessary for decision making. Jacob Reynolds, the controller, asked you to evaluate whether a piece of factory equipment should be replaced or kept.

The old piece of factory equipment was purchased four years ago for $850,000. Over the last four years, JQS has allocated depreciation based on the straight-line method. The expected salvage value is $25,000. The current book value of the factory equipment is $520,000. The operating expenses total approximately $40,000 a year. It is estimated that the residual value (market value) of the old machine is $300,000.      

The controller is contemplating whether to replace the piece of factory equipment. The replacement factory equipment would consist of a purchase price of $400,000, a useful life of eight years, salvage value of 20,000, and annual operating costs of $25,000.

In consideration of the background, prepare a memo in a Word document to submit to the controller. Your first paragraph would be an introduction paragraph of what the memo is about. Next, you will want to consider the equipment replacement decision. To add clarity to your discussion, you can insert a table comparing the old equipment to the new equipment. In evaluating the “relevant” costs, what does your analysis show? Do you recommend that the equipment be replaced or kept ongoing for the next eight years? Why or why not?

Answer 1

4 Solh . This memo is about equipment replacement decision. Now, according to me the Jos should replace the prece of factory equipment. option 1: Keeping the old Machine 850,000 Buying price 4 years ago - $850,000 Dept per year'- 000 - 520,000 – con so current book value $520,000. acc. to se! method Salvage valve :- $25,000 so till full depriciation Let's say it takes n years. 330,000 495,000. 520,000 - 82,500.x = 25.000 .. 2- 520,000 -25,000 = 6 yos. 850,000 520,000 25,000 82,500 t Now) 4 yrs 4 years . 6 yrs. Till end of 6 yrs Total cost :- expenses & Depriciation 6x ( 40,000 + 82,500) - I + option & sell old machine at $300,000 and buy new machine for $400,000 UretuL Life : 8 years. Sawage valve :-$20,000. Annual costs - $25,000. Total cost Annual operating costs till the end 400,000 8year 20,000 of 8 years Loss while buying new machine 380,000 Depriciation (B X 25,000) + (.400,000 - 300,000 ) + (400.000 - 20,000) Annual touy (sell Depr. over 8 years. of Operating price price of Thew costs machine ] machine] $ 680,000 Di - so that buying the new machine over term of next 8 years, we will decrease the overall costs by can see $55,000