Queens Corporation 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 32,000 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	$	80,000
Direct labor		600,000
Manufacturing overhead:
Variable costs		120,000
Fixed costs		80,000

The machinery being considered will cost $710,000 and have an estimated useful life of 5 years, with no salvage value. The machinery will cause the following changes in costs:

Direct labor will decrease by $7.20 per unit.

Direct materials will not change.

Variable manufacturing overhead will decrease by $1.65 per unit.

Fixed manufacturing overhead will increase by $32,000 per year.

Required:

1. Prepare an analysis showing the effect on annual net income of purchasing the equipment.

Analyze: Assume that the use of the new machinery will increase the number of imperfect products produced by 3 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?