Shari Kay owns and operates Perfect Petals, a successful florist shop in Bloomington, Indiana. Two years ago,
Question:
Shari Kay owns and operates Perfect Petals, a successful florist shop in Bloomington, Indiana. Two years ago, Shari purchased a refrigerated display case for $20,000, expecting to use it for 10 years. Unfortunately, Shari's assistant recently (and accidentally) left the case's door open during the night and the motor burned out. The local repair shop has informed Shari that it will cost $4,500 in parts and labor to fix the refrigerated display case (the case needs a new motor and wiring). On the upside, if the existing case is repaired then it will last another 10 years.
Rather than repair the existing display case, Shari is considering purchasing a new refrigerated display case. A new display case would cost Shari $21,000 and last 10 years. In addition, the new case has better insulation than the existing case, and Shari believes that purchasing the new case will save her $100 per month in utility bills.
Ignore the time value of money in all of the subsequent questions. Also, ignore income taxes except where instructed otherwise.
Required:
a. Should Shari repair the existing case or purchase the new case? In addition to the facts above, assume that the existing case has a book value of $16,000 but, given its current condition, cannot be sold (i.e., the existing case has a current sales value of $0).
b. Assume the existing display case has a book value of $10,000 rather than $16,000. Would this information affect your answer to part (a)?
c. Assume the existing case has a book value of $16,000 and can be sold in its current condition for $5,000 (rather than $0 as assumed in part [a]). Would this information affect your answer to part (a)?
d. Assume that the existing case has a book value of $16,000 and can be sold for $5,000. In addition, assume that Shari pays income taxes equal to 30% of profit. Finally, Shari depreciates all of her assets using straight-line depreciation and zero assumed salvage value. In light of this information, should Shari repair the existing case or purchase the new case?
e. What other factors should Shari likely consider in her decision regarding whether to repair or replace her existing refrigerator display case?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
a The key aspect of this problem is to recognize that the original cost of the existing case 20000 is a sunk cost and therefore is not relevant for the decision to repair the existing case or buy a ne...View the full answer
Managerial Accounting
ISBN: 978-1118385388
2nd edition
Authors: Ramji Balakrishnan, Konduru Sivaramakrishnan, Geoff B. Sprinkle
