P4–10 Relevant cost analysis; book value Time allowed: 25 minutes Murl Plastics Ltd purchased a new machine one year ago at a cost of

£60,000. Although the machine operates well, the managing director (MD)

wondered if the company should replace it with a new electronically operated machine that has just come on the market. The new machine would slash annual operating costs by two-thirds, as shown in the comparative data below:

In trying to decide whether to purchase the new machine, the MD has prepared the following analysis:

‘Even though the new machine looks good,’ said the managing director, ‘we can’t get rid of the old one if it means taking a huge loss on it. We’ll have to use it for at least a few more years.’
Sales are expected to be £200,000 per year, and selling and administrative expenses are expected to be £126,000 per year, regardless of which machine is used.
Required 1 Prepare a summary profit statement covering the next five years, assuming:

(a) That the new machine is not purchased.

(b) That the new machine is purchased.

2 Determine the desirability of purchasing the new machine using only relevant costs in your analysis.

Transcribed Image Text:

Present machine 60,000 Proposed New machine 90,000 5 years 14,000 18,000 Purchase cost new Estimated useful life new Annual operating costs 6 years 42,000 Annual straight-line depreciation 10,000 Remaining book value 50,000 Salvage value now 10,000 Salvage value in 5 years 0