Westwood Furniture Company is considering the purchase of two different machines, as described below: Machine A. A compacting machine has just come onto the market that would permit Westwood Furniture Company to compress sawdust Into various shelving products. At present the sawdust is disposed of as a waste product. The following information is available on the machine a. The machine would cost $513,300 and would have a 10% salvage value at the end of its 13-year useful life. The company uses straight-line depreciation and considers salvage value in computing depreciation deductions. b. The shelving products manufactured from use of the machine would generate revenues of $420,000 per year. Variable manufacturing costs would be 20% of sales. c. Fixed expenses associated with the new shelving products would be as follows (per year); advertising. $107,600, salarles, $135,000; utilities, $4,300; insurance, $2,100. Machine B. A second machine has come onto the market that would allow Westwood Furniture Company to automate a sanding process that is now done largely by hand. The following Information is available: a. The new sanding machine would cost $292,500 and would have no salvage value at the end of its 13.year useful life. The company would use straight-line depreciation on the new machine. b. Several old pleces of sanding equipment that are fully depreciated would be disposed of at a scrap value of $12,500. c. The new sanding machine would provide substantial annual savings in cash operating costs. It would require an operator at an annual salary of $10150 and $3.450 in annual maintenance costs. The current, hand operated sanding procedure costs the company $97,000 per year in total Westwood Fumiture Company requlies a simple rate of return of 15% on all equipment purchases. Also, the company will not purchase equipment unless the equipment has a payback period of four years or less. Required: 1. For machine A o. Prepare an income statement showing the expected net income each year from the new shelving products. Use the contribution format (Round your answers to the nearest whole dollar amount.) Required: 1. For machine A a. Prepare an income statement showing the expected net income each year from the new shelving products. Use the contribution format. (Round your answers to the nearest whole dollar amount.) WESTWOOD FURNITURE COMPANY Income Statement Deduct Fixed expenses Total forced expenses b. Compute the simple rate of return. (Round Intermediate calculations to the nearest whole dollar amount and final answer to 1 decimal place .e., 0.123 should be considered as 12.3%). b. Compute the simple rate of return. (Round intermediate calculations to the nearest whole dollar amount and final answer to 1 decimal place (i... 0.123 should be considered as 12.3%).) c. Compute the payback period. (Round intermediate calculations to the nearest whole dollor amount.) Payback period yours 2. For machine B: a. Compute the simple rate of return Simple rate of return b. Compute the payback period. Payback penod years 2. For machine B: a. Compute the simple rate of return. Simple rate of return % b. Compute the payback period. Payback period years 3. According to the company's criteria, which machine, if either, should the company purchase? Machine A Machine B
