Starling Co. is considering disposing of a machine with a book value of $20,200

Question

Starling Co. is considering disposing of a machine with a book value of $20,200 and estimated remaining life of five years. The old machine can be sold for $5,700. A new high-speed machine can be purchased at a cost of 71,400. 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 $22,800 to $19,500 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is

a.increase of $49,200

b.decrease of $63,960

c.increase of $63,960

d.decrease of $49,200

Explanation / Answer

Calculate differential net income :

so answer is a) Increase 49200

Old machine New machine Variable manufacturing cost -22800*5 = -114000 -19500*5 = -97500 New machine cost 0 -71400 Salvage value of old machine 0 5700 Total -114000 -163200

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