Question

Part 3 Waterways is considering the replacement of an antiquated machine that has been slowing down production because of breakdowns and added maintenance. The operations manager estimates that this machine still has 2 more years of possible use. The machine produces an average of 50 units per day at a cost of $6.50 per unit, whereas other similar machines are producing twice that much. The units sell for $8.50. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $55,000 and have a 2-year life. Instructions Given the information above, (g) what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns?

Answer 1

If Waterways replaces the old machine that is slowing down production, they will have a net loss of $3,000.

Step-by-step explanation:

The machine produces:

50 units per day at a cost of $6.50 each for 260 days a year, and the selling price of each unit is $8.50

Waterways current profit on each unit:

$8.50 - $6.50 = $2.00

Current Profit over the 2 years remaining life of the machine:

$2.00 * 260 * 2 * 50= $52,000

Profit if the machine is replaced =

$2.00 * 260 * 2 * (50 * 2) - $55,000

= $49,000

The company's net cost :

$49,000 - $52,000 = -$3,000

If Waterways replaces the old machine that is slowing down production, they will have a net loss of $3,000.