(Ignore Income Taxes in This Problem

question 78

Essay

(Ignore income taxes in this problem. )The management of an amusement park is considering purchasing a new ride for $40,000 that would have a useful life of 10 years and a salvage value of $4,000.The ride would require annual operating costs of $19,000 throughout its useful life.The company's discount rate is 8%.Management is unsure about how much additional ticket revenue the new ride would generate-particularly because customers pay a flat fee when they enter the park that entitles them to unlimited rides.Hopefully,the presence of the ride would attract new customers.
Required:
How much additional revenue would the ride have to generate per year to make it an attractive investment?

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Definitions:

Absorption Costing

An accounting method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.

Variable Costing

A cost system that excludes fixed costs from product costs and writes off all fixed costs against income in the year that the costs are incurred. Also called direct costing.

Step-fixed Costs

Expenses that remain constant for a set level of production or output, but can change when a certain threshold is crossed.

Inflationary Price Increase

The rise in prices of goods and services over time, typically due to an increase in the money supply or demand outpacing supply.