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Answer:
WESTWOOD FURNITURE COMPANY
1) MACHINE A:
a) Income Statement
$ $
Revenue 300,000
Variable Cost (60,000)
Contribution Margin 240,000
Fixed Expenses:
Advertising 40,000
Salaries 110,000
Utilities 5,200
Insurance 800
Depreciation 31,500
Total Fixed Expense (187,500)
Net Operating Income 52,500
b) Simple rate of return = (Average Annual Income/Initial Investment) * 100
= (52500/378000) * 100
= 13.89%
c) Payback period = Investment/Annual Income
= 420000/84000
= 5 years
2) MACHINE B:
a) Simple rate of return = (Average Annual Income/Initial Investment) * 100
= (38250/225000) * 100
= 17%
b) Payback period = Investment/Annual Income
= 225000/56250
= 4 years
3) According to the company's criteria, machine B should be purchased because it meets the requirement of Payback period of 4 years or less and the required rate of return of 15% and above. While machine A does not meet any of these criteria.
Explanation:
1a) Variable cost = 300000 * 0.2 = $60,000
Depreciation = (cost - salvage value)/useful life
= (420000 - 42000)/12
= #31,500
b) Initial Investment = Cost of the machine - salvage value
= 420000 - 42000
= 378000
c) For Payback Period = Depreciation is ignored as it is not a cash item, therefore, Annual Income = 52500 + 31500 = 84000
Also note that the salvage value comes after the 12 years, so it is ignored
2a) Income = Savings from old machine - (Annual salary + annual maintenance cost) - Depreciation
= 78000 - (16350 + 5400) - 18000
= 78000 - 21750 - 18000
= 38250
Depreciation = 234000/13 = 18000
Initial Investment = Cost of machine - Salvage value from old machine
= 234000 - 9000
= 225000
For Payback Period = Depreciation is ignored as it is not a cash item, therefore, Annual Income = 38250 + 18000 = 56250
The income statement is termed as the financial statement of the company because it contains or maintains the record of all the transactions of the company.
It keeps a record of all the assets and debt of the company in order to ascertain the payback and the holdings of the company.
The income statement has been attached below.
b) Simple rate of return =[tex]\frac{ \text{Average Annual Income}}{\text{Initial Investment}} \times 100[/tex]
= [tex]\frac{52500}{378000} \times100[/tex]
= 13.89%
c) Payback period = [tex]\frac{\text{Investment}}{\text{Annual income}}[/tex]
= [tex]\frac{420000}{84000}[/tex]
= 5 years
2) MACHINE B:
a) Simple rate of return = [tex]\frac{ \text{Average Annual Income}}{\text{Initial Investment}} \times 100[/tex]
= [tex]\frac{38250}{225000}\times 100[/tex]
= 17%
b) Payback period =[tex]\frac{\text{Investment}}{\text{Annual income}}[/tex]
= [tex]\frac{225000}{56250}[/tex]
= 4 years
3) Machine B should be purchased based on the company's criteria since it fits the payback period requirement of 4 years or less and the needed rate of return of 15% or more. Machine A, on the other hand, does not fulfill any of these requirements.
1a) Variable cost = [tex]300000 \times0.2 = \$60,000[/tex]
Depreciation = [tex]\frac{\text{cost - salvage value}}{\text{useful life}}[/tex]
= [tex]\frac{420000-42000}{12}[/tex]
= $31,500
b) Initial Investment = Cost of the machine - salvage value
= 420000 - 42000
= 378000
c) Annual Income = 52500 + 31500 = 84000 for Payback Period = Depreciation is ignored because it is not a cash item, hence Annual Income = 52500 + 31500 = 84000.
It's also worth noting that the salvage value isn't calculated until after 12 years, therefore it's left out.
2a) Income = Savings from old machine - (Annual salary + annual maintenance cost) - Depreciation
= 78000 - (16350 + 5400) - 18000
= 78000 - 21750 - 18000
= 38250
Depreciation = [tex]\frac{234000}{13} = 18000[/tex]
Initial Investment = Cost of the machine - Salvage value from the old machine
= 234000 - 9000
= 225000
Depreciation is not considered because it is not a cash item, hence Annual Income = 38250 + 18000 = 56250.
To know more about the calculation of the depreciation and the incomes, refer to the link below:
https://brainly.com/question/15396329
