. Tommy has been using the same machines to make its name brand clothing for the

Question

. Tommy has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $50,000 and a market value of $10,000. They are expected to have an eight-year remaining life and $1,000 salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have an eight-year useful life and $5,000 salvage value. The operating expenses associated with the old machines are $15,000 a year.

Should Tommy keep or replace the machine, and how would that decision impact profitability?

Explanation / Answer

New Machine Old machine Operating exp =Rs9000 Operating Expense =Rs 15000 Depriciation =cost -scrap /life Depriciation =cost -scrap /life =(50000-5000)/8 =(100000-1000)/8 5625 12375 the operating expense and depriciation expenses of new machine is less in comparison with old machine , so company replace old machine with new machine Cost saving by new machine = 12750

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