Reference no: EM132803175

A company is faced with a decision on whether to automate or not. If the company decides to automate the factory, the cost of direct labour will be reduced by 20 per cent, material wastage will be reduced, resulting in annual savings of 10 per cent on the cost of direct materials and supervisors' wages will be reduced by 25 per cent. The company will have to purchase a new multi-purpose machine costing $5,000,000. This will increase the cost of utilities by $12,500. The machine will produce the spindles and cut other pieces of materials that are currently being produced using direct labour. The machine has an estimated life of eight years and it has a salvage value of $844,000. The company, using the straight line method of deprecition, will be charging $507,000 per annum as depreciation expense.

Diret labour is curently $2,674,000, direct materials $2,520,000 and supervisors' wages $500,000.

Problem 1: Calculate the total relevant costs or savings associated with acquiring the new multi-purpose machine