Question: 1. Granfield Company has a piece of manufacturing equipment with a book value of $37,500 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $21,500. Granfield can purchase a new machine for $115,000 and receive $21,500 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,500 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:
$19,500 increase
$74,000 decrease
$16,000 decrease
$50,250 increase
$19,500 decrease
2. Minor Electric has received a special one-time order for 600 light fixtures (units) at $8 per unit. Minor currently produces and sells 3,000 units at $9.00 each. This level represents 75% of its capacity. Production costs for these units are $9.00 per unit, which includes $6.00 variable cost and $3.00 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $550 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $850 on the special order, the size of the order would need to be:
75 units.
1,400 units.
2,800 units.
600 units.
700 units.