Wildhorse Company is considering the purchase of a new machine. The invoice price of the machine is $165,000, freight charges are estimated to be $5,000, and installation costs are expected to be $7,000. Salvage value of the new equipment is expected to be zero after a useful life of 5 years. Existing equipment could be retained and used for an additional 5 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would have to be scrapped. Wildhorse's accountant, Lisah Huang, has accumulated the following data regarding annual sales and expenses with and without the new machine. 1. 2. 3. 4 5. Without the new machine, Wildhorse can sell 14,000 units of product annually at a per unit selling price of $100. If the new machine is purchased, the number of units produced and sold would increase by 10%, and the selling price would remain the same. The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine the gross profit rate will be 25% of sales, whereas the rate will be 30% of sales with the new machine. Annual selling expenses are $212,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased. Annual administrative expenses are expected to be $118,000 with the old machine, and $133,000 with the new machine. The current book value of the existing machine is $42,000. Wildhorse uses straight-line depreciation.
Wildhorse Company is considering the purchase of a new machine. The invoice price of the machine is $165,000, freight charges are estimated to be $5,000, and installation costs are expected to be $7,000. Salvage value of the new equipment is expected to be zero after a useful life of 5 years. Existing equipment could be retained and used for an additional 5 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would have to be scrapped. Wildhorse's accountant, Lisah Huang, has accumulated the following data regarding annual sales and expenses with and without the new machine. 1. 2. 3. 4 5. Without the new machine, Wildhorse can sell 14,000 units of product annually at a per unit selling price of $100. If the new machine is purchased, the number of units produced and sold would increase by 10%, and the selling price would remain the same. The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine the gross profit rate will be 25% of sales, whereas the rate will be 30% of sales with the new machine. Annual selling expenses are $212,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased. Annual administrative expenses are expected to be $118,000 with the old machine, and $133,000 with the new machine. The current book value of the existing machine is $42,000. Wildhorse uses straight-line depreciation.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Please do not give solution in image format ? And Explain Proper Step by Step.
Transcribed Image Text:Sales
Costs and expenses
Cost of goods sold
Selling expenses
Administrative expenses
Purchase price
Net income.
Total costs and
expenses
$
Wildhorse should
Retain Old Machine
Should Wildhorse keep the existing machine or buy the new machine?
$
$
Purchase New Machine
111
$
(Decrease)
CUL
Transcribed Image Text:Wildhorse Company is considering the purchase of a new machine. The invoice price of the machine is $165,000, freight charges are
estimated to be $5,000, and installation costs are expected to be $7,000. Salvage value of the new equipment is expected to be zero
after a useful life of 5 years. Existing equipment could be retained and used for an additional 5 years if the new machine is not
purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine
would have to be scrapped. Wildhorse's accountant, Lisah Huang, has accumulated the following data regarding annual sales and
expenses with and without the new machine.
1.
2
3.
4.
5.
Without the new machine, Wildhorse can sell 14,000 units of product annually at a per unit selling price of $100. If the new
machine is purchased, the number of units produced and sold would increase by 10%, and the selling price would remain
the same.
The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine the
gross profit rate will be 25% of sales, whereas the rate will be 30% of sales with the new machine.
Annual selling expenses are $212,000 with the current equipment. Because the new equipment would produce a greater
number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased.
Annual administrative expenses are expected to be $118,000 with the old machine, and $133,000 with the new machine.
The current book value of the existing machine is $42,000. Wildhorse uses straight-line depreciation.
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