Question

Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 5-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000. Prepare an analysis showing whether the old machine should be retained or replaced.

Answer 1

Answer and Explanation:

The preparation of the analysis showing whether the old machine should be retained or replaced is presented below:

Particulars Retained equipment Replace equipment Change in the net income

Variable cost $1,560,000 $1,230,000 $330,000

($520,000 × 3 years) ($410,000 × 3 years)

Cost of the new

machine $300,000 -$300,000

Net change $30,000

As we can see the amount comes in positive which reflects that the machine should be replaced