Question

Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.

Current Machine New Machine
Original purchase cost $15,230 $25,080
Accumulated depreciation $ 6,800 _
Estimated annual operating costs $24,950 $19,560
Useful life 5 years 5 years

If sold now, the current machine would have a salvage value of $8,490. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.

Prepare an incremental analysis. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

The incremental cost is ($10,360)

Step-by-step explanation:

Analysis of total cost over the 5 year period

Retain Old Machine Buy New Machine

Variable / Incremental Operating

Costs

Old Machine 124,750

New Machine 97,800

Old Machine Book Value

Retain: Annual depreciation 8,430

Buy : Lump sum written off 8,430

Old Machine Disposal (8,490)

Purchase Cost of New Machine 25,080

Total Cost 133,180 122,820

The use of new machine will result in lower cost for the next 5 years.The incremental cost is ($10,360)