(New Equipment Decision) Harry’s Pizzeria currently uses a gas pizza oven to cook pizzas. Harry was approached by a sales representative from Superior Restaurant Supplies, who offered a new wood-burning pizza oven from Italy that will be cheaper to operate and may increase the sales at the restaurant due to overall demand for “authentic wood-fired” pizzas. Harry has compiled the following information about the two types of ovens:
|
Current Oven |
Wood-Burning Oven |
|
|
Original cost |
$10,000 |
$45,000 |
|
Accumulated depreciation |
$ 3,000 |
– |
|
Current salvage value |
$ 5,000 |
– |
|
Remaining life |
10 years |
10 years |
|
Annual operating expenses |
$ 5,000 |
$ 2,000 |
|
Expected increase in sales |
$ 7,000 |
|
|
Disposal value in 10 years |
$ 2,000 |
$ 5,000 |
- What costs are relevant to this decision?
- What costs are not relevant?
- What is the overall cost or benefit of replacing the oven over the next 10 years?
- Are there other factors that need to be considered before Harry makes a decision?