Starling Co. is considering disposing of a machine with a book value of $20,800

Question

Starling Co. is considering disposing of a machine with a book value of $20,800 and estimated remaining life of five years. The old machine can be sold for $5,900. A new high-speed machine can be purchased at a cost of 67,100. 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 $23,200 to $19,800 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is

increase of $44,200

decrease of $44,200

decrease of $57,460

increase of $57,460

Explanation / Answer

Depreciation on old machine : 20800/5= 4160

Depreciation on new machine : 67100/5= 13420

correct option is "B" -decrease of $44,200

SAving In variable manufacturing cost [23200-19800] 3400 Depreciation expense [4160-13420] -9260 Increase /(decrease)in net income per year --5860 Total Decrease (over 5 years) -5860*5=- 29300 Loss on sale of old machine [5900-20800] - 14900 Decrease in income 44200

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