The production department of Y Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. The following information is available:The company has to pay £3,200 to set up the machine. Insurance costs £450 per annum.If it is bought, the new machine is depreciated on a reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year, and the estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 delivery cost is incurred for this purchase option.If it is rented, £ 4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For the rent option, the delivery cost remains at 20% of the £ 500 (the delivery cost for purchase option). For the rent option, the firm is not going to sell old machines.Q) Should the company buy or rent a new machine?

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Answered: Should the company buy or rent a new…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The production department of Y Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. The following information is available:

The company has to pay £3,200 to set up the machine. Insurance costs £450 per annum.
If it is bought, the new machine is depreciated on a reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year, and the estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 delivery cost is incurred for this purchase option.
If it is rented, £ 4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For the rent option, the delivery cost remains at 20% of the £ 500 (the delivery cost for purchase option). For the rent option, the firm is not going to sell old machines.

Q) Should the company buy or rent a new machine?

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