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8 May 2018

Company is trying to decide whether to keep an existing machine or replace it with a new machine. The old machine was purchased just 2 years ago for $40,000 and had an expected life of 12 years. It now costs $1,300 a month for maintenance and repairs. A new machine is being considered to replace it at a cost of $50,000. The new machine is more efficient, and it will cost only $120 a month for maintenance and repairs. The new machine has an e peered life of 12 years. 201. In deciding to replace the old machine, which of the following is a sunk cost? (A) $50,000 (B) $1,300 per month (C) $120 per month (D) $40,000 202.

Which of the following factors would be considered when deciding whether to replace the machine? I. Any estimated salvage value of the old machine II. The lower maintenance cost of the. new machine III. The estimated salvage value of the new machine (A) I and II (B) I, II, and III C) II and III D) I and III

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O Company owns land that they could develop in the future. Olney estimates it can sell the land to Ritter Inc. for $950,000 net of all selling costs. If the land is not sold, Olney will continue with its plans to build three single-family homes on the land. If Olney decided to develop the property, what type of cost would the potential selling price of the land represent in Olney's decision? Sunk

Incremental

Opportunity

Variable

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Which of the following budgets are appropriate for planning because they involve both fixed and variable costs?

Flexible budgets

IL Static budgets

I only

II only

Both I and II

Neither I nor II

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Flexible budgeting is limited because it is highly dependent upon an accurate identification of

fixed cost

variable cost per unit

I only

II only

Both I and II

Neither I nor II

please explain your answers. tk

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Patrina Schowalter
Patrina SchowalterLv2
11 May 2018

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Replace Equipment A machine with a book value of $251,200 has anestimated six-year life. A proposal is offered to sell the oldmachine for $216,800 and replace it with a new machine at a cost of$282,500. The new machine has a six-year life with no residualvalue. The new machine would reduce annual direct labor costs from$50,500 to $40,400.

Prepare a differential analysis dated October 3

on whether to continue with the old machine (Alternative 1) orreplace the old machine (Alternative 2). If an amount is zero,enter zero "0". For those boxes in which you must enter subtractedor negative numbers use a minus sign. Differential AnalysisContinue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)October 3 Continue with Old Machine (Alternative 1) Replace OldMachine (Alternative 2) Differential Effect on Income (Alternative2) Revenues:

Proceeds from sale of old machine $ $ $ Costs:

Purchase price Direct labor (6 years)

Income (Loss) $ $ $

Should the company continue with the old machine (Alternative 1)or replace the old machine (Alternative 2)?

RIGO CORPORATION

Consider each part independently.

Part One

The RIGO Meat Corporation is considering whether it should replace an old machine. The new machine will produce 25% more units than the old machine in the same amount of time. The purchase of the new machine will cause fixed selling costs to increase, but variable selling costs will not be affected. The new machine will require installation by a specialty engineering firm. If the new machine is purchased, the old machine can be sold for a residual value. The old machine requires frequent maintenance to keep it running. The new machine will require maintenance only once per year. The new machine will be paid by cash.

REQUIRED:

For each of the following costs, indicate whether the cost is a differential (incremental) cost, a sunk (irrelevant) cost, or neither. Explain each of your answers.

1. Cost of new machine

2. Cost of old machine

3. Fixed selling costs

4. Variable selling costs

5. Maintenance cost of new machine

6. Maintenance costs of old machine

Part Two

The RIGO Corporation currently makes two types of chairs, Alpha and Beta. The company now has an opportunity to make a third chair, Gamma. In doing so, it will forgo some of the Beta. Very briefly explain what is an opportunity cost in this example.

Feed the Hungry Foundation is a non-profit organization that hasa cost of capital of 12 percent. The foundation is considering thereplacement of a piece of equipment. The old machine has a bookvalue of $3,000 and a remaining estimated life of 5 years with nosalvage value at that time. The salvage value of the old machine iscurrently $1,500. The new equipment will cost $10,000. It has anestimated life of 5 years with no salvage value then. Annual cashoperating costs are $4,000 for the old machine and $2,000 for thenew machine.

A- Refer to Feed the Hungry Foundation. What is the presentvalue of the operating cash outflows for the old machine?

B- Refer to Feed the Hungry Foundation. What is the presentvalue of the operating cash outflows for the new machine?

C- Refer to Feed the Hungry Foundation. What is the presentvalue of salvage value of the old machine if it is replacednow?

D- Refer to Feed the Hungry Foundation. Would you advise theorganization to replace the machine?

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