King Company makes a single product that it sells to retail stores. The firms finishing department uses hand labor to perform its work on all products. A proposal has been made by the companys vice president to acquire machinery that will perform most of the functions of this department. The finishing department has consistently produced 50,000 units a year, and that is the estimated production for the foreseeable future. A summary of the manufacturing costs of the department follows:

Direct materials	$	125,000
Direct labor		937,500
Manufacturing overhead:
Variable costs		187,500
Fixed costs		125,000

The machinery being considered will cost $960,000 and have an estimated useful life of Six years, with no salvage value. The machinery will cause the following changes in costs:

a.	Direct labor will decrease by $9 per unit.
b.	Direct materials will not change.
c.	Variable manufacturing overhead will decrease by $1.75 per unit.
d.	Fixed manufacturing overhead will increase by $50,000 per year.

1.	Prepare an analysis showing the effect on net income of purchasing the equipment. (Round your "per unit" answers to 2 decimal places.)

Analyze:

Assume that the use of the new machinery will increase the number of imperfect products produced by 2 percent of total production. These imperfect products must be reprocessed at a cost of $10 per unit, increasing variable manufacturing costs. What net annual increase or decrease in costs can be projected?