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[answered] Aurora Company is considering the purchase of a new machine


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

 

depreciation.

 

Instructions

 

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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