Incremental Analysis
E 2. The managers of Lennox Company must decide which of two mill blade grinders—Y or Z—to buy. The grinders have the same purchase price but different revenue and cost characteristics. The company currently owns Grinder X, which it bought three years ago for $15,000 and which has accumulated depreciation of $9,000 and a book value of $6,000. Grinder X is now obsolete as a result of advances in technology and cannot be sold or traded in.
The accountant has collected the following annual revenue and operating cost estimates for the two new machines:
|
Grinder Y |
Grinder Z |
|
|
Increase in revenue |
$16,000 |
$20,000 |
|
Increase in annual operating costs |
||
|
Direct materials |
4,800 |
4,800 |
|
Direct labor |
3,000 |
4,100 |
|
Variable overhead |
2,100 |
3,000 |
|
Fixed overhead (depreciation included) |
5,000 |
5,000 |
1. Identify the relevant data in this problem.
2. Prepare an incremental analysis to aid the managers in their decision.
3. Should the company purchase Grinder Y or Grinder Z?