Flying Airways: Cost-Benefit Analysis of Loader Replacement Decision

This report provides a cost analysis for Flying Airways regarding the replacement of an old loader truck. The analysis compares the costs of retaining the existing loader versus purchasing a new replacement. The old loader was purchased for $100,000 with an annual depreciation of $25,000 and annual variable costs of $80,000. The selling price of the loader is $5,000. The replacement option involves a $20,000 purchase cost and annual variable costs of $50,000. The report calculates the total costs for both scenarios, considering depreciation, selling costs, and variable operating costs, concluding that replacing the loader is the more cost-effective decision, saving the company $15,000. The report recommends the purchase of the new loader to the operating manager, Jack Steel, to minimize operational expenses and maximize profitability.

The Flying Airways

TABLE OF CONTENTS
SITUATION 1.................................................................................................................................1
Recommending Flying Airline over replacement of old loader truck........................................1
REFERENCES................................................................................................................................3

SITUATION 1
Recommending Flying Airline over replacement of old loader truck
In accordance with the planning of Flying Airways Company as to replace the old loader
which was purchased and depreciated at straight line method for 5 years. The loader was
purchased for 100000 and it was annually depreciated at 25000 as well as the annual variable
costs incurred as 80000. The selling price of loader is 5000. Therefore, the replacement will cost
them 20000 with the variable operation costs of 50000 annually. Thus, here the professionals
will become able to analyse the costs as well as make the adequate decision which will be
fruitful for them in terms of making the replacements or retaining the old machinery
(MANAGEMENT AND COST ACCOUNTING, 2017). It can be analysed as follows:
Particulars
Retain the present
loader Buy replacement
Variable operating costs 80000 50000
Deprecation over old loader (Final) 25000 25000
selling cost -5000
Cost of new Loader 20000
Total cost 105000 90000
Commentary: In terms the decision of replacing the old loader with new replacement it
can be said that such operations will be fruitful as it costs cheap for the organisation. The older
was purchase for 100000 for the estimated life of 5 years and in these regards the loader has been
depreciated for 4 years and the still it has 1 year of useful life. The variable operating costs of
this truck is 80000 and have the depreciable value of $25000 every year. In context with such
measurements it can be said that the retaining cost of this lorry will be 105000.
Therefore, it the manager plan to replace the machinery the new replacement will have
operating cost of 50000 and the purchasing costs of 20000. There will be measurement were
made such as depreciation over old loader which was the final depreciable value of 25000 and
the selling cost of the machinery has been deducted as 5000. However, the replacement will cost
them 90000.
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Thus, it will be recommended to the operating manager Jack Steel that they must
purchase the new replacement of this truck as it will cost less than compared with retaining it.
Therefore, it will be said that the replacement will be profitable as compared with retaining the
machinery for longer period. Thus, the manager need to make decisions and planning which is
relevant with replacing the loader and it will be fruitful and will help them in overcoming with
the costs of such operations (Adkins and Paxson, 2017). Therefore, such transaction has
difference in both the operations for $15000. Therefore, such amount will be secured and utilised
by the firm in other operational aspects but here the profitable decision lies over the operation
that they must proceed the replacement without waiting for a year (Lambrechts, 2017). On there
side if they plan for replacing thee loader with the conveyor belt than it will be profitable as there
will be less operating costs and the fair depreciation values.
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REFERENCES
Books and Journals
Adkins, R. and Paxson, D., 2017. Replacement decisions with multiple stochastic values and
depreciation. European Journal of Operational Research. 257(1). pp.174-184.
Lambrechts, I. J., 2017. Replacement depreciation and price regulation. Journal of Energy in
Southern Africa. 17(3). pp.10-20.
Online
MANAGEMENT AND COST ACCOUNTING. 2017. [Online]. Available through
:<https://books.google.co.in/books?
id=l2gFCAAAQBAJ&pg=PA249&lpg=PA249&dq=depreciation%2Breplacement
%2Bvariable+operating+cost&source=bl&ots=EtxfAxnGtZ&sig=JoQZp4OP462vMqtB1j
xsRkBbFjU&hl=en&sa=X&ved=0ahUKEwj6-
6D8kM_YAhXLvY8KHRulDHIQ6AEISTAF#v=onepage&q=depreciation
%2Breplacement%2Bvariable%20operating%20cost&f=false>.
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