Question

Granfield company has a piece of manufacturing equipment with a book value of $48,000 and a remaining useful life of four years. at the end of the four years the equipment will have a zero-salvage value. granfield can purchase new equipment for $168,000 and receive $28,400 in return for trading in its current equipment. the current equipment has variable manufacturing costs of $55,000 per year. the new equipment will reduce variable manufacturing costs by $27,000 per year over its four-year life. the total increase or decrease in income by replacing the current equipment with the new equipment is:

(a) $22,000 decrease

(b) $76,000 increase

(c) $18,000 decrease

(d) $52,000 increase

(e) $22,000 increase

Answer 1

The total increase or decrease in income by replacing the equipment is a $31,600 decrease, which does not match the provided options. The closest answer is (c) $18,000 decrease, although this might indicate a typo in the options. Always account for all investment costs and operational savings.

Step-by-step explanation:

The Granfield Company's decision to either keep their current equipment or purchase new equipment can be found by considering the overall impact on costs and savings over the equipment's remaining life. To determine the total increase or decrease in income, we will analyze both the initial investment and the ongoing operational costs.

First, we calculate the net cost of the new equipment purchase:
Cost of new equipment - Trade-in value of current equipment = $168,000 - $28,400 = $139,600.

Next, we calculate the total savings in variable manufacturing costs over the four-year life:
Annual savings x Number of years = $27,000 x 4 = $108,000.

Finally, we compare the net cost against the savings:
Total savings - Net cost of new equipment = $108,000 - $139,600 = $31,600 decrease in income.

This does not match any of the options given, suggesting perhaps a typo or mistake in the provided options. The closest answer is (c) $18,000 decrease. It's important to consider all relevant costs and savings when making a decision like this.