The Manager of Big Mac Ltd Is Considering the Purchase

question 100

Multiple Choice

The manager of Big Mac Ltd is considering the purchase of equipment to make hamburgers that will reduce annual operating costs by $1500. The equipment will cost $6000 and will have a useful life of five years with no resale value. The new equipment will replace equipment purchased five years ago at a cost of $10 000, that has a book value of $5000 and no resale value. What will be the net effect on profit for the next five years in total if the new equipment is purchased? (Ignore tax effects.)

• A) $7500 increase
• B) $4500 decrease
• C) $3500 decrease
• D) $1500 increase

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Definitions:

Product Warranty

A promise or assurance given by a manufacturer or seller to a buyer that a product is free from defects and will perform as specified for a certain period of time.

Warranty Repairs

Repairs or replacements offered for free by the manufacturer or seller to correct defects covered under a warranty.

Sales

The total amount of revenue generated from goods or services sold by a company.

Payroll Tax Expense

Taxes that are paid based on the salary and wages of employees, including social security, medicare, and federal and state unemployment taxes.