Only Three Years After Purchasing a Machine, Greenwich Engineering Has

question 69

Multiple Choice

Only three years after purchasing a machine, Greenwich Engineering has been given details of a new and improved model. This new model will increase output and help reduce costs. The existing machine cost £150,000 and was being depreciated straight-line over an eight-year period. Current estimated scrap value for the existing machine is only £20,000. The estimated scrap value for the existing machine in 5 years is £14,900.
Details of new machine
Costs of new machine £180,000.
Expected life of the machine is 5 years.
At the end of 5 years the estimated scrap value is £15,000.
There will also be an additional cost of £5,000 to send workers on a training course for the new machine. The training will be required before the machine is delivered.
Additional annual fixed costs of £15,000 will be incurred if the new machine is purchased. This cost is included in the fixed overhead cost per unit given below. Finally the management accountant has estimated that additional working capital of £80,000 will be required if the new machine is purchased.
A comparison of the existing and new model is given below: $\begin{array}{|l|c|c|}\hline & \text { Existing Machine } & \text { New Machine } \\\hline \text { Capacity (units) } & 150,000 & 160,000 \\\hline & £ & £ \\\hline \text { Selling price per unit } & 2.62 & 2.95 \\\hline \text { Cost per unit } & & \\\hline \text { Labour } & 1.00 & 0.90 \\\hline \text { Materials } & 0.60 & 0.48 \\\hline \text { Fixed overheads } & 0.20 & 0.18 \\\hline\end{array}$
The required return is 10 per cent Calculate the annual savings for the new machine

• A)£81,200.
• B)£83,200
• C)£101,000.
• D)£95,000.

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