Tunes2Go. a. This year’s income statement: Baseline Rent (Status Quo) Equipment Difference Sales revenue $4,800,000 $4,800,000 Operating costs: Variable (600,000) (600,000) 0 Fixed (cash expenditures) (2,250,000) (2,250,000) 0 Equipment depreciation (450,000) (450,000) 0 Other depreciation (375,000) (375,000) 0 Loss from equipment 0 (2,550,000) a $2,550,000 lower Operating profit (before $1,125,000 $2,550,000 lower a Equipment write-off = $3 million cost $450,000 accumulated depreciation for one – year (equipment was purchased on January 1 of the year). b. Next year’s income statement: Baseline Rent (Status Quo) Equipment Difference Sales revenue $4,800,000 $5,136,000 a $336,000 higher Operating costs: Equipment rental 0 (690,000) 690,000 higher Variable (600,000) (600,000) 0 cash expenditures (2,250,000) (2,115,000) b 135,000 lower Equipment depreciation (450,000) 0 450,000 Other depreciation (375,000) (375,000) 0 Operating profit $1,125,000 $1,356,000 $231,000 higher a $5,136,000 = 1.07 $4,800,000 b $2,115,000 = (1.00 0.06) $2,250,000 – c. Despite the effect on next year’s income statement, the company should not rent the new machine because net cash inflow as a result of installing the new machine ($336,000 + $135,000) does not cash outflow for equipment rental ($690,000).
Tunes2Go. a. This year’s income statement: Baseline (Status Quo) Rent Equipment Difference Sales revenue $4,800,000 $4,800,000 Operating costs: Variable (600,000) (600,000) 0 Fixed (cash expenditures) (2,250,000) (2,250,000) 0 Equipment depreciation (450,000) (450,000) 0 Other depreciation (375,000) (375,000) 0 Loss from equipment 0 (2,550,000) a $2,550,000 lower Operating profit (before $1,125,000 $2,550,000 lower a Equipment write-off = $3 million cost – $450,000 accumulated depreciation for one year (equipment was purchased on January 1 of the year). b. Next year’s income statement: Baseline (Status Quo) Rent Equipment Difference Sales revenue $4,800,000 $5,136,000 a $336,000 higher Operating costs: Equipment rental 0 (690,000) 690,000 higher Variable (600,000) (600,000) 0 cash expenditures (2,250,000) (2,115,000) b 135,000 lower Equipment depreciation (450,000) 0 450,000 Other depreciation (375,000) (375,000) 0 Operating profit $1,125,000 $1,356,000 $231,000 higher a $5,136,000 = 1.07 $4,800,000 b $2,115,000 = (1.00 – 0.06) $2,250,000 c. Despite the effect on next year’s income statement, the company should not rent the new machine because net cash inflow as a result of installing the new machine ($336,000 + $135,000) does not cash outflow for equipment rental ($690,000).
solution-manual-fundamentals-of-cost-accounting-4th-edition-lanen.docx