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 $483,000 and would have a 10% salvage volue 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 $390,000 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, $102,200, salaries, $120,000; utilities, $4,000, insurance, $1,800. Machine B. A second machine has come onto the market that would allow Westwood Fumiture Company to automate a sonding process that is now done largely by hand. The following information is available: a The new sanding machine would cost $273.000 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 pieces of sanding equipment that are fully depreciated would be disposed of at a scrap value of $11,000 c. The new sanding machine would provide substantial annual wings in cash operating costs. It would require an operator at an annual salary of $14.680 and $3,300 in annual maintenance costs. The current, hand-operated sanding procedure costs the company $94,000 per year in total, Westwood Furniture Company requires 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: 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 Sales revenue Add: Variable production expenses Contribution margin Deduct Fored expenses Depreciation @ @ 7 0 Total foed expenses > b. Compute the simple rate of return (Round intermediate calculations to the nearest whole dollar amount and final answer to 1 decimal place (ie., 0.123 should be considered as 12.3%).) Seminarum % c. Compute the payback period. (Round intermediate calculations to the nearest whole dollar amount.) Pato period years 2. For machine B a. Compute the simple rate of return Simple rate of return 96 b. Compute the payback period Payback period years 3. According to the company's criterio, which machine. If either should the company purchase Machine A Machine B
