Question

Butercup Bakery is thinkng about replacing the convection oven with a new more energy eflcent model Infomation related to the old and new ovens folows m(Cick the icon to view the information nelated to the oid and new ovens y Read the requrements Requirement 1 and 2. Which of the costs and benetts above are relevant to the decision to replace the oven? What information is imelevant? Why is it irelevanth Begin by determining whether each item is relevant or imelevant for this decision it an tem is imelevant, select why it is irelevant (Make a selection for each tem in the Old Oven and Ne for imelevant bems. For nelevant bems, leave the bax blank do not select a label) Oven coluns in the Why invant column, only make a selecton New Ovens Old Oven Why Imelevant Onginal cost Accumulabed depreciation Book values Current disposal value Instalation cost Aenual operating cost Terminal disposal value Choose from any drop-down lst and then cick Check Answen i Data Table Old Oven New Oven Original cost S 29,000 $ 48,000 en and Accumulated depreciation 7,000 Not acquired yet Book value 24,000 Not acquired yet Current disposal value 21,000 Not acquired yet Installation cost Not applicable S 2,500 Annual operating cost 17.000 S 11,000 Useful life 10 years 7 years Current age 3 years O years Remaining useful life 7 years 7 years Terminal disposal value (in 7 years) 0 S Ignore the effect of income taxes and the time value of money Print Done - X Requirements he d on. If el.) 1. Which of the costs and benefits above are relevant to the decision to replace Ove the oven? 2. What information is irrelevant? Why is it irrelevant? 3. Should Buttercup Bakery purchase the new oven? Provide support for your answer 4. Is there any conflict between the decision model and the incentives of the manager who has purchased the "old" oven and is considering replacing it only two years later? 5. At what purchase price would Buttercup Bakery be indifferent between purchasing the new oven and continuing to use the old oven? Print Done

Answer 1

46 1&2) Why irrelevant Old Oven New Oven Original Cost Accumulated Depreciation 47 48 Book Value 49 Current Disposal Value 50 51 Installation Cost Annual Operating Cost 52 53 Terminal disposal Value 54 The Current disposal value and annual operating osts of the old oven is relevant The purchase price, I nstallation Cost and annual perating Costs of the new oven are 55 1 56 57 relevant when deciding whether to replae the oven because these are future costs 58 2) The original Cost and Book Value of the old oven are irrelevant because these are 59 irrelevant 60 3) Old Oven (A) New Oven (B) Difference in Relevant 61 Costs (B-A) 62 Original Cost of new oven, 63 48000 48000 64 Installation Cost 2500 2500 Current Disposal Value of Old Oven 65 - 21000 -21000 66 Operating Cost (17000*5), (11000*5) 85000 55000 -30000 85000 Total Relevant Costs 67 84500 -500 68 Yes ,Buttercup Bakery purchase the new oven as it would result in savings of $500 69