ACT 520 Biscayne Bay Kayaks manufactures and sells 2,000 kayaks each year.
Replace Equipment
Biscayne Bay Kayaks manufactures and sells 2,000 kayaks each year. Manufacturing is done in batches of 25 hulls each. Each kayak sells for $6,995. The company uses a machine to form the hulls of the kayaks. The machine was purchased five years ago for $300,000. It is being depreciated using straight-line depreciation with zero salvage value at the end of its 10-year useful life. The old machine can be sold now for $100,000. The company has the opportunity to purchase a new machine for $250,000. It would have a useful life of five years with a salvege value of zero. The new machine would save on the batch cost and the direct materials. Additional information:
Old machine | New machine | |||
Batch setup cost | ||||
Old--three workers two hours | $ 150.00 | |||
New--two workers one hour | $ 50.00 | |||
Raw materials per hull | ||||
Old-- | $ 3,025 | |||
New-- | $ 3,000 |
2.1 Should Biscayne Bay Kayaks purchase the new machine?YES NO
2.2 What is the increase/decrease in profit if Biscayne Bay Kayaks purchases the new machine?
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2.3 If Biscayne Bay Kayaks used accelerated depreciation, the book value of the old machine would be $92,880. Would that change your decision? Why or why not?
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Rating:
/5
Solution: ACT 520 Biscayne Bay Kayaks manufactures and sells 2,000 kayaks each year.