Westwood Furniture Company is considering the purchase of two different items of equipment, as describedbelow:Machine AA compacting machine has just come onto the market that would permit Westwood Furniture Company tocompress 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 $420,000 and would have a 10% salvage value at the end of its 12-year usefullife. The company uses straight-line depreciation and considers salvage value in computing depreciationdeductions.b. The shelving products manufactured from use of the machine would generate revenues of $300,000per year. Variable manufacturing costs would be 20% of sales.c. Fixed expenses associated with the new shelving products would be (per year): advertising, $40,000;salaries, $110,000; utilities, $5,200; and insurance, $800.Machine BA 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 $234,000 and would have no salvage value at the end of its13-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 scrapvalue of $9,000.c. The new sanding machine would provide substantial annual savings in cash operating costs. It wouldrequire an operator at an annual salary of $16,350 and $5,400 in annual maintenance costs. The currenthand-operated sanding procedure costs the company $78,000 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 4.0 years or less.Required:1. For machine A:a. Prepare a contribution format income statement showing the expected net operating income eachyear from the new shelving products.b. Compute the simple rate of return.c. Compute the payback period.2. For machine B:a. Compute the simple rate of return.b. Compute the payback period.3. According to the company’s criteria, which machine, if either, should the company purchase?
Westwood Furniture Company is considering the purchase of two different items of equipment, 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 $420,000 and would have a 10% salvage value at the end of its 12-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 $300,000
per year. Variable
c. Fixed expenses associated with the new shelving products would be (per year): advertising, $40,000;
salaries, $110,000; utilities, $5,200; and insurance, $800.
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 $234,000 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
value of $9,000.
c. The new sanding machine would provide substantial annual savings in cash operating costs. It would
require an operator at an annual salary of $16,350 and $5,400 in annual maintenance costs. The current
hand-operated sanding procedure costs the company $78,000 per year in total.
Westwood Furniture Company requires a simple
the company will not purchase equipment unless the equipment has a payback period of 4.0 years or less.
Required:
1. For machine A:
a. Prepare a contribution format income statement showing the expected net operating income each
year from the new shelving products.
b. Compute the simple rate of return.
c. Compute the payback period.
2. For machine B:
a. Compute the simple rate of return.
b. Compute the payback period.
3. According to the company’s criteria, which machine, if either, should the company purchase?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 6 images
