AF102 Additional Tutorial – S2 2017

Week 7- week beginning 21st August

Topic 7: Incremental analysis

Chapter reference: Chapter 7

BYP

BYP 7-1 DECISION-MAKING ACROSS THE ORGANIZATION

Net Income
Retain Purchase Increase
Old Machine New Machine (Decrease)
Sales $6,000,000 (1) $6,600,000 (2) ($ 600,000
Costs and expenses
Cost of goods sold  4,500,000 (3)  4,620,000 (4) ( (120,000)
Selling expenses    900,000    990,000 (  (90,000)
Administrative expenses    500,000    565,000 (  (65,000)
Purchase price —    150,000 (5) ( (150,000)
Total costs and expenses  5,900,000  6,325,000 ( (425,000)
Net income $  100,000 $  275,000 ($ 175,000

(1) 12,000 X $100 X 5 years = $6,000,000.

(2) $6,000,000 X 110% = $6,600,000.
(3) $6,000,000 X (100% – 25%) = $4,500,000.
(4) $6,600,000 X (100% – 30%) = $4,620,000.
(5) $140,000 + $4,000 + $6,000 = $150,000.

The new machine should be purchased. The incremental analysis shows that net income will
increase from $100,000 to $275,000 over the five years with the new machine.

AF102 Tutorial s2, 2017 Page 1