Bridgeport Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $105,000 for the machine, which was state of the art at the time of purchase. Although the machine will likely last another ten years, it will need a $8,000 overhaul in four years. More important, it does not provide enough capacity to meet customer demand. The company currently produces and sells 15,000 frames per year, generating a total contribution margin of $102,000. Martson Molders currently sells a molding machine that will allow Bridgeport Pix to increase production and sales to 20,000 frames per year. The machine, which has a ten-year life, sells for $140,000 and would cost $15,000 per year to operate. Bridgeport Pix's current machine costs only $8,000 per year to operate. If Bridgeport Pix purchases the new machine, the old machine could be sold at its book value of $5,000. The new machine is expected to have a salvage value of $20,000 at the end of its ten-year life. Bridgeport Pix uses straight-line depreciation. Click here to view the factor table.
Bridgeport Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $105,000 for the machine, which was state of the art at the time of purchase. Although the machine will likely last another ten years, it will need a $8,000 overhaul in four years. More important, it does not provide enough capacity to meet customer demand. The company currently produces and sells 15,000 frames per year, generating a total contribution margin of $102,000. Martson Molders currently sells a molding machine that will allow Bridgeport Pix to increase production and sales to 20,000 frames per year. The machine, which has a ten-year life, sells for $140,000 and would cost $15,000 per year to operate. Bridgeport Pix's current machine costs only $8,000 per year to operate. If Bridgeport Pix purchases the new machine, the old machine could be sold at its book value of $5,000. The new machine is expected to have a salvage value of $20,000 at the end of its ten-year life. Bridgeport Pix uses straight-line depreciation. Click here to view the factor table.
Chapter21: Risk Management
Section: Chapter Questions
Problem 5P
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