University Of California, Davis Operations And Supply Chain Management Assignment Help - Aurora Company

Question - Aurora Company is considering the purchase of a new machine. The invoice price of the machine is
$140,000, freight charges are estimated to be $4,000, and installation costs are expected to be
$6,000. 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. Aurora’s accountant, Lisah Huang,
has accumulated the following data regarding annual sales and expenses with and without the new
machine.
1. W ithout the new machine, Aurora can sell 12 ...Read More ,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.
2. 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.
3. Annual selling expenses are $180,000 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.
4. Annual administrative expenses are expected to be $100,000 with the old machine, and $113,000
with the new machine.
5. The current book value of the existing machine is $36,000. Aurora uses straight-line depreciation.

Instructions
With the class divided into groups, prepare an incremental analysis for the 5 years showing whether
Aurora should keep the existing machine or buy the new machine. ...Read Less

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