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13 July, 03:42

Part 3 Waterways is considering the replacement of an antiquated machine that has been slowing down production because of breakdowns and added maintenance. The operations manager estimates that this machine still has 2 more years of possible use. The machine produces an average of 50 units per day at a cost of $6.50 per unit, whereas other similar machines are producing twice that much. The units sell for $8.50. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $55,000 and have a 2-year life. Instructions Given the information above, (g) what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns?

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  1. 13 July, 07:41
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    If Waterways replaces the old machine that is slowing down production, they will have a net loss of $3,000.

    Explanation:

    The machine produces:

    50 units per day at a cost of $6.50 each for 260 days a year, and the selling price of each unit is $8.50

    Waterways current profit on each unit:

    $8.50 - $6.50 = $2.00

    Current Profit over the 2 years remaining life of the machine:

    $2.00 * 260 * 2 * 50 = $52,000

    Profit if the machine is replaced =

    $2.00 * 260 * 2 * (50 * 2) - $55,000

    = $49,000

    The company's net cost:

    $49,000 - $52,000 = - $3,000

    If Waterways replaces the old machine that is slowing down production, they will have a net loss of $3,000.
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