Question

QUESTION 49

Ida Enterprises is considering replacing a machine that is presently used in its production process. The following information is available:

​	Old Machine	Replacement Machine
Original cost	$60,000	$35,000
Remaining useful life in years	5	5
Current age in years	5	0
Book value	$25,000	​
Current disposal value in cash	$8,000	​
Future disposal value in cash (in 5 years)	$0	$0
Annual cash operating costs	$7,000	$4,000

Which of the information provided in the table is irrelevant to the replacement decision?

		The annual operating cost of the old machine
		The original cost of the old machine
		The current disposal value of the old machine
		Both The annual operating cost of the old machine and The current disposal value of the old machine

2 points   

QUESTION 50

Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow:

​	Total	Hiking	Fashion
Sales revenue	$480,000	$340,000	$140,000
Variable expenses	$385,000	265,000	120,000
Contribution margin	95,000	75,000	20,000
Fixed expenses	77,000	38,500	38,500
Operating income (loss)	$18,000	$36,500	$(18,500)

Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Fashion line is used to increase the production of Hiking boots by 250%, how will operating income be affected?

		Decrease $92,500
		Increase $92,500
		Increase $265,000
		Increase $110,500

Answer 1

49. The irrelevant information in the table is

b. Orginal cost of the old machine.

That is because the orginal cost of the old machine is the sunk cost which is not relevant for the purpose of decision making.

50. b. Increase in profit $92,500.

	Total	Hiking	Fashion
(a). Sales revenue	$ 850,000	$ 850,000	0
(b). Less:- Variable Expenses	$ 662,500	$ 662,500	0
(c). Contribution (a-b)	$ 187,500	$ 187,500	0
(d). Fixed expenses	$ 77,000	$ 38,500	$ 38,500
(e). Operating Income (c-d)	$ 110,500	$ 149,000	($ 38,500)

New profit = $ 110,500

less:- old profit = $18,000

Increase in profit 92500