48 35 36 Question 2 - 15 marks 37 38 Q2. Greenlife Woodworks Inc is considering purchasing two different items of machinery, as described below 39 40 Machine A. 41 A machine has just come onto the market that compresses sawdust into various shelving products Currently, the sawdust is 42 disposed of as a waste product. The following information is available about the machine 43 44 a. The machine would cost $800.000 and would have a 25% salvage value at the end of its 10-year useful life. The company 45 uses straight-line depreciation and considers salvage value in computing depreciation deductions 46 b. The shelving products produced by the machine would generate revenues of $580.000 per year. Variable manufacturing costs would be 20. of sales. c. Fixed annual expenses associated with the new shelving products would be advertising $45.000. salaries $80,000; 49 utilities, $10.000: and insurance, $15.000. 50 51 Machine B: 52 A second machine has come onto the market that would automate a sanding process that is now done 53 largely by hand. The following information is available about this machine 54 55 a The new sanding machine would cost $220.000 and would have no salvage value at the end of its 10-year useful life. 56 The company would use straight-line depreciation. 57 b. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a scrap value of $7.200. 58 c. The new sanding machine would provide substantial annual savings in cash operating costs. It would require an 59 operator at an annual salary of $26,000 and $3.000 in annual maintenance costs. The current hand-operated sanding 60 procedure costs the company $85,000 per year. 61 52 The company requires a simple rate of return of 16% on all equipment purchases and also the company 53 will not purchase equipment unless the equipment has a payback period of four years or less. 54 55 Required: 56 +7 a). For machine A prepare a Contribution margin income statement using proper format showing the expected net operating income each 8 year from the new shelving products. (8 marks) New FORMULA SHEET SEOTION 4 SECTION 6 SEOTION 5 SEOTION 3 SEOTION 2 Instructions 1 of return of 16" on all equipment purchases and also the company 63 will not purchase equipment unless the equipment has a pay back period of four years of less ---- 64 65 Required: 66 67 a) For machine A prepare a Contribution margin income statement using proper format showing the expected net operating income exch 68 vear from the new shelving products, 8 marks) 69 70 Greenlife Woodworks Inc. 71 Contribution Format Income Statement 72 Show anylall workings nere 73 74 75 76 77 78 79 80 81 82 83 19% 84 85 86 6). For machine A compute the simple rate of return. (1 mark) 87 88 89 c). For machine A compute the payback period. (1 mark) Ivears 90 91 92 d) For machine B. compute the simple rate of return 2 marks). 93 194 95 e) For machine B compute the payback period. (1 mark) Vears 96 97 98 / According to the company s investment criteria, which machine (A or B) 99 should the company purchase? (1 mark) 100 101 g) Brietly explain why vou chose Machine A or B in your answer in () above? (1 mark) 102 103 104