Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.

If sold now, the current machine would have a salvage value of $10,260. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.

Prepare an incremental analysis.(Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Retain Machine		Replace Machine		Net Income Increase (Decrease)
Operating costs		$		$		$
New machine cost
Salvage value (old)
Total		$		$		$

Should the current machine be replaced?
The current machine should beretainedreplaced.

Exercise

Gruden Company produces golf discs which it normally sells to retailers for $6.87 each. The cost of manufacturing 22,800 golf discs is:

Gruden also incurs 5% sales commission ($0.34) on each disc sold.

McGee Corporation offers Gruden $5 per disc for 5,300 discs. McGee would sell the discs under its own brand name in foreign markets not yet served by Gruden. If Gruden accepts the offer, its fixed overhead will increase from $46,512 to $51,412 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Prepare an incremental analysis for the special order.(Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g.

		Reject Order		Accept Order		Net Income Increase (Decrease)
Revenues		$		$		$
Materials
Labor
Variable overhead
Fixed overhead
Sales commissions
Net income		$		$		$

Should Gruden accept the special order?

Gruden shouldacceptrejectthe special order.

Exercise

Jobs, Inc. has recently started the manufacture of Tri-Robo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,000 Tri-Robos is as follows.

Jobs is approached by Tienh Inc., which offers to make Tri-Robo for $106 per unit or $2,120,000.

Assume that $320,000 of the fixed overhead cost can be reduced (avoided). Prepare incremental analysis.(Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Make		Buy		Net Income Increase (Decrease)
Direct materials		$		$		$
Direct labor
Variable overhead
Fixed overhead
Purchase price
Total annual cost		$		$		$

Determine whether Jobs should accept this offer.

Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Tienh Inc., Jobs can use the released productive resources to generate additional income of $320,000. Prepare incremental analysis.(Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Make		Buy		Net Income Increase (Decrease)
Direct materials		$		$		$
Direct labor
Variable overhead
Fixed overhead
Opportunity cost
Purchase price
Totals		$		$		$

Determine whether Jobs should accept this offer.