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    Instances of Replacement Analysis and Break Even

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    Aira Monica Fagaragan Antalan
    The document discusses different reasons for replacing existing assets or equipment: increasing maintenance costs, declining efficiency, inadequacy, obsolescence, or a combination of factors. It defines the "defender" as the existing asset being considered for replacement and the "challenger" as the proposed replacement asset. Examples are provided to illustrate how to calculate the total capital investment, unamortized value, and determine the most economical replacement option using break-even analysis.

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    Instances of Replacement Analysis and Break Even

    Uploaded by

    Aira Monica Fagaragan Antalan
    30 views16 pages
    The document discusses different reasons for replacing existing assets or equipment: increasing maintenance costs, declining efficiency, inadequacy, obsolescence, or a combination of factors. It defines the "defender" as the existing asset being considered for replacement and the "challenger" as the proposed replacement asset. Examples are provided to illustrate how to calculate the total capital investment, unamortized value, and determine the most economical replacement option using break-even analysis.

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    INSTANCES OF REPLACEMENT ANALYSIS AND BREAK EVEN

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    The document discusses different reasons for replacing existing assets or equipment: increasing maintenance costs, declining efficiency, inadequacy, obsolescence, or a combination of factors. It defines the "defender" as the existing asset being considered for replacement and the "challenger" as the proposed replacement asset. Examples are provided to illustrate how to calculate the total capital investment, unamortized value, and determine the most economical replacement option using break-even analysis.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    30 views16 pages

    Instances of Replacement Analysis and Break Even

    Uploaded by

    Aira Monica Fagaragan Antalan
    The document discusses different reasons for replacing existing assets or equipment: increasing maintenance costs, declining efficiency, inadequacy, obsolescence, or a combination of factors. It defines the "defender" as the existing asset being considered for replacement and the "challenger" as the proposed replacement asset. Examples are provided to illustrate how to calculate the total capital investment, unamortized value, and determine the most economical replacement option using break-even analysis.

    Copyright:

    © All Rights Reserved
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    of 16

    INSTANCES OF

    REPLACEMENT
    ANALYSIS
    ◦REPLACEMENT DUE TO CONSTANTLY INCREASING
    MAINTENANCE COSTS

    ◦REPLACEMENT DUE TO DECLINING EFFICIENCY

    ◦REPLACEMENT DUE TO INADEQUACY

    ◦REPLACEMENT DUE TO OBSOLESCENSE

    ◦REPLACEMENT DUE TO COMBINATION OF CAUSES


    Sunk Cost Due to Unamortized Value
    the difference between book value and the resale value of the equipment when it is
    replaced is called unamortized value.

    The Defender and the Challenger Concept


    defender is the existing asset which is being considered for replacement, while the
    challenger is the asset which is proposed to replace the existing asset.
    Example:
    1. The purchase price of a certain new automobile (challenger) being considered for use in your business is P1,050,000.
    Your firm’s present automobile (defender) can be sold on the open market for P500,000. The defender was
    purchased with cash three years ago, and its current BV is P600,000. To make the defender comparable in continued
    service to the challenger, your firm would need to make some repairs at an estimated cost of P75,000.
    Based on this information,
    a. What is the total capital investment in the defender, using the outsider viewpoint?
    b. What is the unamortized value of the defender?

    Solution:
    a.

    b.
    Example:
    2. A company purchased a numerically controlled machine for a manufacturing process three years ago. It is
    expected to be used for three more years with annual operating costs of P225,000. However, due to rapid
    technological improvement of such machines, better machines are now available. Data for 2 possible replacements
    Machines A and Machines B, and the defender are as follows:

    Defender Machine A Machine B


    First Cost - P1,600,000 P2,250,000
    Salvage Value - 300,000 450,000
    Life in Years 3 10 15
    Annual Operating Cost P225,000 160000 180,000
    Trade-in Value of the Defender 500000 600,000

    If the invested capital must earn 16%, determine which machine is more economical.
    BREAK-EVEN
    ANALYSIS
    4. General Electric Company which manufacture electric motor has a capacity of producing 150 motors a month. The
    variable costs are P4,000 per month, the average selling price of the motor is P750.00 per motor. Fixed costs of the
    company amount to P78,000 per month which includes all taxes. Determine the number of motors to be produced per
    month to break even and the sales volume in pesos at this point?

    Solution:
    Expenses per month:
    4000 + 78000 = 82000.00

    To Break Even:
    82000 = 750x
    x = 110 units
    5. A plywood manufacturer produces a piece of plywood at a labor cost of P0.50 and material at P3.00. The Fixed
    charges on business are P50,000 a month and the variable cost is P0.50 a piece. If one plywood sells for P6.00 each, how
    many pieces must be produced each month for the manufacturer to break-even?

    Solution:
    Let x = the number of pieces of plywood produced each month
    Labor cost = P0.50x
    Material cost = P3.00x
    Fixed Cost = P50,000 + P0.50x
    Selling price = P6.00x

    To break even, the total sales must be equal to the total cost of production, that is, there is no profit nor loss.
    0.50x + 3x +50000 + 0.50x = 6x
    4x + 50000 = 6x
    2x = 50000
    X = 25,000 pieces of plywood

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