5.3. Maximum Profit Method Overview

Try these first

1. 1.

   What is the formula to calculate annual profit?

   Hint

   Think about what subtracting costs from revenue represents.

2. 2.

   Define Cumulative Profit.

   Hint

   Consider how profits from multiple years add up.

3. 3.

   What does the Maximum Profit Method focus on?

   • Minimizing costs
   • Maximizing profits
   • Managing depreciation

   Hint

   Think about what the method's name implies regarding profits.

4. 4.

   True or False: The economic life of machinery is defined as the period of maximum cumulative profit.

   • True
   • False

   Hint

   Consider whether the definition aligns with how we’ve discussed economic life.

5. 5.

   A machine generates the following annual profits over six years: 10 lakh, 12 lakh, 15 lakh, 14 lakh, 8 lakh, and 5 lakh. Calculate the average annual cumulative profit over these years.

   Hint

   Remember to divide total cumulative profits by the total number of years.

6. 6.

   If the current machine has a decreasing estimated profit from 20 lakh to 18 lakh in the second year while the proposed new machine shows a steady profit of 22 lakh, should the current machine be replaced?

   Hint

   Compare current estimated profits against those of the proposed machine.