Pan Corporation incurs costs of $1.8 million building a custom piece of machinery for one of its customers. The machine is 90% complete when Pan receives notice that the customer has declared bankruptcy. As a result, the customer is not able to accept delivery or pay anything for the machinery it ordered. Due to the custom design of the machine, there are no other potential buyers. Pan can sell the machine as scrap for $80,000 or it can redesign and complete the machine for $900,000, after which it could be sold for $1 million. Given the above information and assuming Pan's cost and revenue estimates pertaining to scrapping or rebuilding the machine are accurate, answer the following questions: 1. Costs irrelevant to this decision total $. 2. If Pan sells the machine as scrap, its incremental income will increase by $.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Pan Corporation incurs costs of $1.8 million building a custom piece of machinery for one of its customers. The machine is 90% complete when Pan receives notice that the customer has declared bankruptcy. As a result, the customer is not able to accept delivery or pay anything for the machinery it ordered. Due to the custom design of the machine, there are no other potential buyers. Pan can sell the machine as scrap for $80,000 or it can redesign and complete the machine for $900,000, after which it could be sold for $1 million. Given the above information and assuming Pan's cost and revenue estimates pertaining to scrapping or rebuilding the machine are accurate, answer the following questions:
1. Costs irrelevant to this decision total $.
2. If Pan sells the machine as scrap, its incremental income will increase by $.
3. If Pan rebuilds and then sells the machine, its incremental income will increase by $.
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