Question

Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

Existing van New van

Original cost $56,000 $95,000

Annual operating cost $22,500 $15,000

Accumulated depreciation $33,000 —

Current salvage value of the existing van $27,500 —

Remaining life 10 years 10 years

Salvage value in 10 years $ 0 $ 0

Annual depreciation $2,300 $9,500



If Hartley's Meat Pies replaces the existing delivery van with the new one, over the next 10 years operating income will ________.

Answer 1

Over the next 10 years, Hartley's Meat Pies will see an increase in operating income by $3,000 if they replace their existing delivery van with the new one, due to savings in operating costs despite the additional depreciation expense.

Step-by-step explanation:

If Hartley's Meat Pies replaces the existing delivery van with the new one, over the next 10 years operating income will increase by the amount saved in operating costs, less any additional depreciation expense. To calculate this, we subtract the annual operating costs of the new van from the existing van's costs, and then also consider the increased depreciation expense of the new van.

Annual savings in operating costs: $22,500 - $15,000 = $7,500.
Additional annual depreciation expense: $9,500 - $2,300 = $7,200.
Annual increase in operating income = $7,500 - $7,200 = $300.

Over the 10-year period, this results in total savings of $300 × 10 = $3,000. Therefore, over the next 10 years, operating income will increase by $3,000 if the new van replaces the existing van.