Question

Waterways Continuing Problem 07 (Part 3)

Waterways is considering the replacement of an antiquated machine that has been slowing down production because of breakdowns and added maintenance. The operations manager estimates that this machine still has 2 more years of possible use. The machine produces an average of 50 units per day at a cost of $6.70 per unit, whereas other similar machines are producing twice that much. The units sell for $8.90. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $59,900 and have a 2-year life.

Given the information above, what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns?

Replacing the machine will result in a

net profitnet loss

of $ . Waterways

should notshould

keep the old machine.

Answer 1

Particulars	Keep Machine	Replace Machine	Loss
No. of Units produced in 2 years	26000	52000
	(50units*260days)*2years	(100units*260days)*2years
Revenue	231400	462800
(no. of units * sale price)
Less: Cost	174200	348400
(no. of units * cost per unit)
Less: purchase price of new machine	59900
Net profit	57200	54500	(2,700)
Replacing the machine will result in net loss of $2700
WATER WAYS should keep the old machine