Santosh Plastics Inc. purchased a new machine one year ago at a cost of $63,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market.

The new machine costs $94,500 and is expected to slash the current annual operating costs of $44,100 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $10,500 if the company decides to buy the new machine. The company uses straight-line depreciation.

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

Book value of the old machine = $52,500

Less: Salvage value =10,500

Net loss from disposal = $42,000

Even though the new machine looks good, said the president, we cant get rid of that old machine if it means taking a huge loss on it. Well have to use the old machine for at least a few more years.

Sales are expected to be $220,500 per year, and selling and administrative expenses are expected to be $132,300 per year, regardless of which machine is used.

Required:

Question:

1. What is the minimum saving in annual operating costs that must be achieved in order for the president to consider buying the new machine?

Minimum Saving in costs?: