Doherty Company has a factory machine with a book value of $89,851 and a remaini

Question

Doherty Company has a factory machine with a book value of $89,851 and a remaining useful life of 4 years. A new machine is available at a cost of $209,240. This machine will have a 4-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $634,920 to $ 419,540. Instructions: Prepare an analysis showing whether the old machine should be retained or replaced. Explain why the machine should be retained or replaced.
Retain Equipment Replace Equipment Net 4-Year Income Increase (Decrease)
Variable manufacturing costs
New machine cost
Total

Explanation / Answer

Net Income Retain Replace Increase (Decrease) Variable manufacturing costs $2,539,680a $1,678,160b $861,520 New machine cost 209,240 (209,240) Total 2,539,680 $1,887,400 $652,280 a(4 years x $634,920) b(4 years x $419,540) Decision: replace equipment. Lower variable manufacturing costs more than offset cost of new equipment. The book value of the old machine does not affect the decision.

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