ABC Company is a company that employs only people with physical or mental disabilities. One of the organization’s activities is to make cookies for its snack food store. Several years ago, ABC Company purchased a special cookie-cutting machine. As of December 31, 2010, this machine will have been used for three years.
Management is considering the purchase of a newer, more efficient machine. If purchased, the new machine would be acquired on December 31, 2010. Management expects to sell 300,000 dozen cookies in each of the next six years. The selling price of the cookies is expected to average $1.15 per dozen.
The ABC Company has two options:
1. Continue to operate the old machine, or
2. Sell the old machine and purchase the new machine.
No trade-in was offered by the seller of the new machine. The following information has been assembled to help management decide which option is more desirable.
Original cost of machine at acquisition……………………..$80,000 $120,000
Remaining useful life as of December 31, 2010…… 6yrs 6yrs
Expected annual cash operating expenses:
Variable cost per dozen……………………………… $.38 $.29
Total fixed costs…………………………………….. $21,000 $11,000
Assume that all operating revenues and expenses occur at the end of the year.
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