ense soft ice cream. The equipment would cost P800,000 and have an eight-year useful life with no salvage value. Incremental annual revenue and costs associated with the sale of ice cream would be as follows: Sales ₱ 1,500,000 Variable expenses 900,000 Contribution margin ₱ 600,000 Fixed expenses: Salaries 270,000
Coney Island Fun Centers, Inc. operates amusement parks. Some of the vending machines in one of its parks provide very little revenue, so the company is considering removing the machines and installing equipment to dispense soft ice cream. The equipment would cost P800,000 and have an eight-year useful life with no salvage value. Incremental annual revenue and costs associated with the sale of ice cream would be as follows:
|
Sales |
₱ 1,500,000 |
|
Variable expenses |
900,000 |
|
Contribution margin |
₱ 600,000 |
|
Fixed expenses: |
|
|
Salaries |
270,000 |
|
Maintenance |
30,000 |
|
|
100,000 |
|
Total fixed expenses |
400,000 |
|
Net operating income |
₱ 200,000 |
3. Compute the payback period (expressed in years).
4. Given the criteria above, should the company install the soft ice cream equipment or not? Why?
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