QUESTION 1:
BE7-7 Kobe Company has a factory machine with a book value of $90,000 and a remaining useful life
of 5 years. It can be sold for $30,000. A new machine is available at a cost of $300,000. This machine
will have a 5-year useful life with no salvage value. The new machine will lower annual variable
manufacturing costs from $600,000 to $500,000. Prepare an analysis showing whether the old machine
should be retained or replaced.
QUESTION 2:
E7-3 Leno Company manufactures toasters. For the first 8 months of 2014, the company reported the
following operating results while operating at 75% of plant capacity:
Sales (350,000 units) $4,375,000
Cost of goods sold 2,600,000
Gross profit 1,775,000
Operating expenses 840,000
Net income $ 935,000
Cost of goods sold was 70% variable and 30% fixed; operating expenses were 75% variable and 25%
fixed. In September, Leno Company receives a special order for 15,000 toasters at $7.60 each from
Centro Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,000 of
shipping costs but no increase in fixed operating expenses.
