A year ago, Crunchy Cola Corporation bought a stamping machine to make the cans for its cola. The cost of the machine was $60,000. The machine has a useful life of 5 years and a salvage value of zero at the end of those five years. Annual depreciation on the machine is $12,000. One year of depreciation has been recorded. The variable manufacturing cost of producing the cans is $0.05 per can. The only fixed manufacturing cost is the annual depreciation of $12,000 on the stamping machine. Crunchy needs 200,000 cans annually. Dagmar Stamping Company recently gave Crunchy an offer to supply all of its can needs for the next four years at $0.07 per can. If Crunchy buys from Dagmar, the stamping machine would not be needed and would be sold for $35,000. If Crunchy buys from Dagmar, what will be the total dollar increase or decrease in income for the next four years?

Question

Quizplus · Accepted Answer

If Crunchy buys from Dagmar, it will save on the variable cost of $0.05 per can for 200,000 cans annually, totaling $40,000 per year. However, it will incur a cost of $0.07 per can, totaling $56,000 per year. The difference is an additional cost of $16,000 per year. Over four years, this totals $64,000. Selling the machine for $35,000 offsets this cost, resulting in a net increase in income of $19,000 over four years.

A Year Ago, Crunchy Cola Corporation Bought a Stamping Machine