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1. What are the relevant costs in this decision? 2. Should Justco upgrade its equipment or replace it? Show all of your calculations. 3. Assume that the expected annual sales are not known, what is the breakeven point between the two approaches in annual units sold?

1. What are the relevant costs in this decision? 2. Should Justco upgrade its equipment or replace it? Show all of your calculations. 3. Assume that the expected annual sales are not known, what is the breakeven point between the two approaches in annual units sold?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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3. Justco currently uses an older piece of equipment to manufacture wooden porch swings. This equipment is expected to last only two more years and has a net book value of $200,000 and zero salvage value. The company is considering either upgrading its current equipment or purchasing new equipment. If the current equipment is upgraded, Justco expects to spend $4 million. The upgraded equipment will last five years, have an expected residual value of $400,000 at that time, and is expected reduce variable manufacturing costs from $200 per swing to $180 per swing. Alternatively, the company could purchase new equipment for $12 million. The new equipment will also last five years, have an estimated salvage value of $800,000, and reduce variable manufacturing coast to $160 per swing. If Justco expects sales to average 100,000 units per year, answer the following questions. 1. What are the relevant costs in this decision? 2. Should Justco upgrade its equipment or replace it? Show all of your calculations. 3. Assume that the expected annual sales are not known, what is the breakeven point between the two approaches in annual units sold?
Transcribed Image Text:3. Justco currently uses an older piece of equipment to manufacture wooden porch swings. This equipment is expected to last only two more years and has a net book value of $200,000 and zero salvage value. The company is considering either upgrading its current equipment or purchasing new equipment. If the current equipment is upgraded, Justco expects to spend $4 million. The upgraded equipment will last five years, have an expected residual value of $400,000 at that time, and is expected reduce variable manufacturing costs from $200 per swing to $180 per swing. Alternatively, the company could purchase new equipment for $12 million. The new equipment will also last five years, have an estimated salvage value of $800,000, and reduce variable manufacturing coast to $160 per swing. If Justco expects sales to average 100,000 units per year, answer the following questions. 1. What are the relevant costs in this decision? 2. Should Justco upgrade its equipment or replace it? Show all of your calculations. 3. Assume that the expected annual sales are not known, what is the breakeven point between the two approaches in annual units sold?
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