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B 51 52 Machine B: A second machine has come onto the market that would automate a sanding process that is now done largely by hand. The following information is available about this machine: 53 54 55 56 a. The new sanding machine would cost $220,000 and would have no salvage value at the end of its 10-year useful life. 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. c. The new sanding machine would provide substantial annual savings in cash operating costs. It would require an 9 operator at an annual salary of $26,000 and $3,000 in annual maintenance costs. The current, hand-operated sanding 0 procedure costs the company $85,000 per year. 58 1 2. The company requires a simple rate of return of 16% on all equipment purchases and also, the company will not purchase equipment unless the equipment has a payback period of four years or less. ns Required: a). For machine A, prepare a Contribution margin income statement using proper format showing the expected net operating income each year from the new shelving products. (8 marks) Halliburton Woodworks Inc. Contribution Format Income Statement Show anylall workin % b). For machine A, compute the simple rate of return. (1 mark) c). For machine A, compute the payback period. (1 mark) years % d). For machine B, compute the simple rate of return (2 marks). years e). For machine B, compute the payback period. (1 mark) 7). According to the company's investment criteria, which machine (A or B) hould the company purchase? (1 mark) Briefly explain why you chose Machine A or B in your answer in (f) above? (1 mark) SON CECOT 96 97 98 f). According to the company's investment criteria, which machine (A or B) 99 should the company purchase? (1 mark) 100 101 g) Briefly explain why you chose Machine A or B in your answer in (f) above? (1 mark) 102 103 104 105 106 107 SECTION 6 FORMULA SHE Instructions SECTION 2 SECTION 5 SECTION 3 SECTION 4 READY ILL 1980 Question 2 - 15 marks 36 37 38 Q2. Halliburton 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 $795,000 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. 26 b. The shelving products produced by the machine would generate revenues of $375,000 per year. Variable manufacturing 17 costs would be 20% of sales. 8 c. Fixed annual expenses associated with the new shelving products would be advertising, $45,000; salaries, $80,000; 9 utilities, $10,000; and insurance, $15,000. Machine B: A second machine has come onto the market that would automate a sanding process that is now done largely by hand. The following information is available about this machine: ho a. The new sanding machine would cost $220,000 and would have no salvage value at the end of its 10-year useful life. The company would use straight-line depreciation. b. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a scrap value of $7,200. c. The new sanding machine would provide substantial annual savings in cash operating costs. It would require an operator at an annual salary of $26,000 and $3,000 in annual maintenance costs. The current, hand-operated sanding procedure costs the company $85,000 per year. The company requires a simple rate of return of 16% on all equipment purchases and also, the company Instructions SECTION 2 SECTION 3 SECTION 4 SECTION 5 SECTION 6 FORMULA SHEET | 52 63 BO procedure costs the company $85,000 per year. 61 The company requires a simple rate of return of 16% on all equipment purchases and also, the company will not purchase equipment unless the equipment has a payback period of four years or 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 each 68 year from the new shelving products. (8 marks) 69 70 Halliburton Woodworks Inc. Contribution Format Income Statement 71 72 Show anylall workings 73 74 75 76 77 ^ w 78 79 80 31 32 3 7 b). For machine A, compute the simple rate of return. (1 mark) %