Question

Aurora Company is considering the purchase of a new machine. The invoice price of the machine is $140,000, freight charges are estimated to be $4,000, and installation costs are expected to be $6,000. Salvage value of the new equipment is expected to be zero after a useful life of 5years. 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 12,000 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 $180,000 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 $100,000 with the old machine, and $113,000 with the new machine.
5.		The current book value of the existing machine is $36,000. Aurora uses straight-line depreciation.

With the class divided into groups, 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				$		$		$
Costs and expenses
	Cost of goods sold
	Selling expenses
	Administrative expenses
	Purchase price
		Total costs and expenses
Net income				$		$		$

Answer 1

Solution:

Given that:

  Aurora Company is considering the purchase of a new machine. The invoice price of the   machine is $140,000, freight charges are estimated to be $4,000, and installation costs are expected to be $6,000.

auYoYa company is considevin Puchase of a nes Machine. The invoice Price ope Machine veight charges ae Eskmated to be $ ,, and nsta- aon csts are expected to be $6,000 4,000, and nstq Income calculabion wlitout e eachine itt, old Machine Annual sale 100o units ale Price - loo Pe uni 25% of sales Annual sellincj expenses :수 :80000 mua al Admiへ; strative expen ses 100,000 cuYYent value Machiner«t - 36,000 Salvage Value Zero Depreciation PevcleaY CsLr1) is, > Nalue l useful lfel 360o0 5 2001 per yer

2 nnual ale512,o0012,o 12,o0012,00012,00o Cunit5) sales Pricelo0 loo too sales value |;2ooooo !!2ooooo IlLOOOOO İlgoooool 12000 200000 00000 110000000000 "roS Proft c25% ef sales)| 300,000 Annual elline | 30000 о і Зооооо!3cooooj3ooooo 80,o0o 18o.ooo i8o,ooo 18o/oco 18o,o00 xpenses Expenbe;s Depreciation: 구오00 チ200 2.00 | 구노 OO 구오 Jet income 28oo 280098o2800 1800 exeore rotal income for 1800 x 5 - 5 64,000

* cal cuanon gf net inc ncome wt neul Machine ne cost lyoooot Чооо +6000 salvage value # zeYO useful lipe -5 year5 Depreciabion Per year ts, Value ol Machine /use 30,o0o Per year nnual ales unit5 - 11000 + lo/. of 12000 0 ales Pric loo Pe uni Annual sales expenses ts, Annual Adm Epenses 3ooo

오 Annual áale5 3 200o 13200 3200 3200132oo >ales Pr'ce Perloo loo oO O0 lo0 5 64000 hereas net income fo ge wit neo Machine i5 [500o aple Leaving tt ero n balance sheet af fer 5 year Means -fuu e tlachine value 275ooo a teT aborbhon of Machine Cos