Question

Your answer is partially correct. Try again. Aurora Company is considering the purchase of a new machine. The invoice price of the machine is $162,000, freight charges are estimated to be $5,000, and installation costs are expected to be $7,000. Salvage value of the new equipment is expected to be zero after a useful life of 5 years. Existing equipment could be retained and used for an additional 5 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would have to be scrapped. Aurora's accountant, Lisah Huang, has accumulated the following data regarding annual sales and expenses with and without the new machine. 1. Without the new machine, Aurora can sell 14,000 units of product annually at a per unit selling price of $100. If the new machine is purchased, the number of units produced and sold would increase by 10%, and the selling price would remain the same. 2. The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine the gross profit rate will be 25% of sales, whereas the rate will be 30% of sales with the new machine. 3. Annual selling expenses are $209,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased. 4. Annual administrative expenses are expected to be $116,000 with the old machine, and $131,000 with the new machine. 5. The current book value of the existing machine is $42,000. Aurora uses straight-line depreciation. Prepare an incremental analysis for the 5 years. (Ignore income tax effects.) (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Retain Old Machine Purchase New Machine Net Income Increase (Decrease) Sales 1400000 Costs and expenses X Cost of goods sold X X Selling expenses X Administrative expenses Purchase price Total costs and expenses Net income Should Aurora keep the existing machine or buy the new machine?

Answer 1

Solution - Increminal Anay Isis Aurora company Retain old machine 7,000,000 |(14,000 * 100*5) purchase New machine 7,700,000 14,000* 100 * 5 * 1.10 lovel income increan Dec yeae) 700,000.00 Sales Costs and Expen 5310000 140,000.00 Cost of goods Sold too, ooo 5250000 (Too oooo 751) (7,700,000* 7o) 104,500.00 Selling Expenses 1645.000 (209.000*5) 1,149,500 * 1.10) |(202,000 5 75000.00 Administrative expeno 580000 ( 116000*5) 655,000 (131000*5 174000.00 e 174,000 0.00 surchase price ( 162000t 200ot 7000) Total costs and Expenses Net income 6,875000 125000 7368500 351500 493500 2065oo

yes, Aurora should buy the machine

5250000+1045000+580000=6875000

5390000+1149500+655000+ 174000=7368500

7000000-6875000=125000

7700000-7368500=331500

331500-125000=206500