Two Different Machines Are Under Consideration for a Reengineering Project

question 1

Short Answer

Two different machines are under consideration for a reengineering project. Machine X is expected to have an initial cost of $74,000 and an expected life of 7 years. It will have a fixed cost of $10,000 per year and a variable cost of $60 per unit per year. Process Y is expected to have a useful life of 9 years. It will have a fixed cost of $8500 per year and a variable cost of $57 per unit per year. Determine the amount the company can spend on Machine Y so the two machines will break even at an interest rate of 11% per year. Assume the current process capacity of 150 units per year is used for the analysis.

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Definitions:

Service Charge Expense

Costs incurred by a company for the services provided by another entity, often including bank fees or utilities.

Factoring Receivables

A financial transaction where a business sells its accounts receivable to a third party at a discount in exchange for immediate cash.

Allowance for Doubtful Accounts

A contra asset account on a company’s balance sheet that represents the amount of receivables it does not expect to collect.

Credit Sales

Sales transactions where the customer is allowed to pay at a later date, typically generating accounts receivable.