I need help with the assignment attached, for my managerial accounting class ch.7 ?"incremental analysis"
Aurora Company is considering the purchase of a new machine. The invoice price of the
machine is $140,000, freight charges are estimated to be $4,000, and installation costs are
expected to be $6,000. Salvage value of the new equipment is expected to be zero after a
useful life of 5 years. Existing equipment could be retained and used for an additional 5
years if the new machine is not purchased. At that time, the salvage value of the equipment
would be zero. If the new machine is purchased now, the existing machine would have to be
scrapped. Aurora???s accountant, Lisah Huang, has accumulated the following data
regarding annual sales and expenses with and without the new machine.
1. Without the new machine, Aurora can sell 12,000 units of product annually at a per unit
selling price of $100. If the new machine is purchased, the number of units produced and
sold would increase by 10%, and the selling price would remain the same.
2. The new machine is faster than the old machine, and it is more efficient in its usage of
materials. With the old machine the gross profit rate will be 25% of sales, whereas the rate
will be 30% of sales with the new machine.
3. Annual selling expenses are $180,000 with the current equipment. Because the new
equipment would produce a greater number of units to be sold, annual selling expenses are
expected to increase by 10% if it is purchased.
4. Annual administrative expenses are expected to be $100,000 with the old machine, and
$113,000 with the new machine.
5. The current book value of the existing machine is $36,000. Aurora uses straight-line
With the class divided into groups, prepare an incremental analysis for the 5 years showing
whether Aurora should keep the existing machine or buy the new machine.
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