The management of a private hospital is considering the installation of an automatic telephone switchboard, which would replace a manual switchboard and eliminate the attendant operator's position. The class of service provided by the new equipment is estimated to be at least equal to the present method of operation. Five operators are needed to provide telephone service three shifts per day, 365 days per year. Each operator earns $14,000 per year. Company-paid benefits and overhead are 25% of wages. Money costs 8% after income taxes. Combined federal and state income taxes are 40%. Annual property taxes and maintenance are 2%% and 4% of investment, respectively. Depreciation is 15-year straight line. Disregarding inflation, how large an investment in the new equipment can be economically justified by savings obtained by eliminating the present equipment and labor costs? The existing equipment has zero salvage value.

The management of a private hospital is considering the installation of an automatic telephone switchboard, which would replace a manual switchboard and eliminate the attendant operator's position. The class of service provided by the new equipment is estimated to be at least equal to the present method of operation. Five operators are needed to provide telephone service three shifts per day, 365 days per year. Each operator earns $14,000 per year. Company-paid benefits and overhead are 25% of wages. Money costs 8% after income taxes. Combined federal and state income taxes are 40%. Annual property taxes and maintenance are 2%% and 4% of investment, respectively. Depreciation is 15-year straight line. Disregarding inflation, how large an investment in the new equipment can be economically justified by savings obtained by eliminating the present equipment and labor costs? The existing equipment has zero salvage value.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter3: Cost Behavior And Cost Forecasting

Section: Chapter Questions

Problem 36E

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