Benson Co. is considering disposing of a machine with a book value of $12,500 an

Question

Benson Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The total net differential increase or decrease in cost for the new equipment for the entire five years is: A. Decrease of $11,000 B. Decrease of $15,000 C. Increase of $11,000 D. Increase of $15,000

Explanation / Answer

Proposal to Replace Equipment
Annual variable costs—present equipment $26,000
Annual variable costs—new equipment $23,500
Annual differential decrease in cost $2,500
Number of years applicable x 5
Total differential decrease in cost $12,500

Proceeds from sale of present equipment $1500 $ 14,000

Cost of new equipment $25,000
Net differential Increase in cost, 5-years $11,000

So Ans is C. Increase of $11,000

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