Question

The Flying Airlines company has been operating for five years and is currently in the process of restructuring its operations due to the challenging conditions it is facing both in its local and international operations.

To this end it has asked you to advise it on the best course of action and any concerns or problems it may encounter in each situation.

SITUATION 1 ) At Sydney Airport the company has a three year old loader truck which it uses to load meals on to aeroplanes with the box being lifted hydraulically to the aeroplane’s side doors.

The loader was bought three years ago at $100,000 and is depreciated straight line to zero over its four year life - so the loader has one year useful life remaining. This loader could be sold now for $5,000.

In addition to its annual depreciation of $25,000, the Flying Airlines Company incurs $80,000 annually in variable operating costs to operate the loader. The Operations Manager, Jack Steele, is facing a decision about replacement of the loader.

A new loader would cost $20,000 to purchase and would last for one year and would incur $50,000 in annual variable operating costs.

REQUIRED) Based on the above costs what should the Flying Airlines do?

Replace the loader truck with the conveyor belt now or wait for another year and then replace the loader truck with the conveyor belt?

Show calculations and explanation. Ignore the time value of money.

Answer 1

SOLUTION:- Additional cost to be incurred on the new loader truck will be as follows:-

cost of new loader=$20000

annual variable operating costs=$50000

less: scrap value of old truck= (5000)

net additional cost to be incurred=65000

CURRENT COST OF OLD LOADER TRUCK WILL BE AS FOLLOWS:-

annual variable operating costs=$80000

conclusion:- the company should replace the loader truck with conveynor belt now because it results in the savings of cost by $15000{ 80000-65000}