Question

Sandhill Roofing is faced with a decision. The company relies
very heavily on the use of its 60-foot extension lift for work on
large homes and commercial properties. Last year, Sandhill Roofing
spent $71,400 refurbishing the lift. It has just determined that
another $37,000 of repair work is required. Alternatively, it has
found a newer used lift that is for sale for $156,500. The company
estimates that both lifts would have useful lives of 6 years. The
new lift is more efficient and thus would reduce operating expenses
by about $23,800 per year. Sandhill Roofing could also rent out the
new lift for about $9,000 per year. The old lift is not suitable
for rental. The old lift could currently be sold for $23,000 if the
new lift is purchased.

Prepare an incremental analysis showing whether the company should
repair or replace the equipment. **(Enter negative
amounts using either a negative sign preceding the number e.g. -45
or parentheses e.g. (45).)**

RetainEquipment |
ReplaceEquipment |
Net IncomeIncrease (Decrease) |
||||

Operating expenses | $ | $ | $ | |||

Repair costs | ||||||

Rental revenue | ||||||

New machine cost | ||||||

Sale of old machine | ||||||

Total cost | $ | $ | $ |

Should company repair or replace the equipment?

The equipment

shouldshould not

be replaced.

Answer #1

Ans:

Particulars | Retain Equipment | Replace Equipment | Net Income Increase[ Decrease] |

Operating Expenses | [23,800*6]= 142,800 | 142,800 | |

Repair Costs | 37,000 | 37,000 | |

Rental Revenue | (54,000) | 54,000 | |

New Machine Cost | 156,500 | (156,500) | |

Sale of old machine | (23,000) | 23,000 | |

Total Costs | 179,800 | 79,500 | 100,300 |

Note: The Analysis shows if purchased new Equipment will have net income of $100,300 in period of 6 Years and by this way company should replace the Equipment.

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old machine could be sold for $62,700. The annual variable
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