Question

Sarasota Company has a factory machine with a book value of $86,300 and a remaining useful life of 7 years. It can be sold for $33,500. A new machine is available at a cost of $359,000. This machine will have a 7-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $623,300 to $461,800. Prepare an analysis showing whether the old machine should be retained or replaced.

Answer 1

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Step-by-step explanation:

Analysis showing whether the old machine should be retained or replaced is as prepared below:

Retain Replace Net Income

Equipment Equipment Increase(Decrease)

Variable manufacturing costs 43,63,100 32,32,600 11,30,500

New machine costs 0 3,59,000 -3,59,000

Sell old machine 0 -33,500 33,500

Total 43,63,100 35,58,100 8,05,000

The old factory machine should be replaced as there is increase in net income by 805,000 when old machine is replaced.