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 $6.50 per unit, whereas other similar machines are producing twice that much. The units sell for $8.50. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $55,000 and have a 2-year life. Instructions Given the information above, (g) what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns?

Question

Business

Meredith

21 February, 04:59

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 $6.50 per unit, whereas other similar machines are producing twice that much. The units sell for $8.50. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $55,000 and have a 2-year life. Instructions Given the information above, (g) what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns?

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Answers (1)

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Ajax · Answer 1

If Waterways replaces the old machine that is slowing down production, they will have a net loss of $3,000.

Explanation:

The machine produces:

50 units per day at a cost of $6.50 each for 260 days a year, and the selling price of each unit is $8.50

Waterways current profit on each unit:

$8.50 - $6.50 = $2.00

Current Profit over the 2 years remaining life of the machine:

$2.00 * 260 * 2 * 50 = $52,000

Profit if the machine is replaced =

$2.00 * 260 * 2 * (50 * 2) - $55,000

= $49,000

The company's net cost:

$49,000 - $52,000 = - $3,000

If Waterways replaces the old machine that is slowing down production, they will have a net loss of $3,000.