23. Starling Co. is considering disposing of a machine with a book value of $23,

Question

23. Starling Co. is considering disposing of a machine with a book value of $23,300 and estimated remaining life of five years. The old machine can be sold for $5,600. A new high-speed machine can be purchased at a cost of 68,100. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $22,600 to $19,000 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is

increase of $57,850

decrease of $44,500

increase of $44,500

decrease of $57,850

Explanation / Answer

Savings in annual variable manufacturing costs over 5 years 18000 =(22600-19000)*5 Less: Net cost of purchase 62500 =68100-5600 Differential effect on income -44500 Decrease of $44,500

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