Question

Bryant Company has a factory machine with a book value of $93,700 and a remaining useful life of 7 years. It can be sold for $34,700. A new machine is available at a cost of $378,500. This machine will have a 7-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $605,900 to $457,900. Prepare an analysis showing whether the old machine should be retained or replaced

Answer 1

Retain Replace Net income

Increase/Decrease

Variable manufacturing costs 4241300 3205300 1036000

New machine cost 0 378500 -378500

Sell old machine 0 -34700 34700

Total 4241300 3549100 692,200

Conclusion: The old factory machine should be replaced as its net income is lesser

Workings

Variable manufacturing costs

a. Retain Equipment = 605900*7 = 4241300

b. Replace Equipment =457900*7 = 3205300