Management Accounting Assignment( MA )

Added on - May 2020

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Running Head: Management AccountingREPLACEMENT DECISIONMAKING
Management Accounting1Situation 1Introduction:In this case the flying airlines company is considering to replace its old truck loader with anew one. The new loader will cost it for $ 20000. However, it will realise $ 5000 on sale ofold loader. Therefore, the net cost it will have to incur for the purchase of proposed loaderwill be $ 15000. Further, the new loader will operate with the annual variable cost of $ 50000whereas the older one was operating with the annual variable cost of $ 80000. Hence, it canbe said that there will be a saving in the variable cost by $ 30000. This savings in cost isequivalent to the cash inflows for the company.Analysis:Old LoaderCost of asset$ 1,00,000.00Useful Life4Depreciation$ 25,000.00Salvage Value$ 5,000.00Annual cash outflow (1 to 4 yearseach)$ 80,000.00New LoaderCost$ 20,000.00Annual Cash outflow(Variable cost)$ 50,000.00Initial outflow:Cost of acquisition$ 20,000.00Less: Amount realised on sale of oldloader$ 5,000.00Net Outflow$ -15,000.00Less: Decrease in variable cost($80000-$50000)$ 30,000.00
Management Accounting2Net Savings in cost in the year ofpurchase$ 15,000.00Conclusion:From the below calculations it can be said that the company will have a net benefit of $15000 in the year of purchase i.e. at the end of 3rdyear of old loader. Thus, it must replace theold truck with the new one immediately without waiting for another year.
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