Question

Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 5-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000.

Required:
Prepare an analysis showing whether the old machine should be retained or replaced.

Answer 1

Answer and Explanation:

The preparation of the analysis is shown below:

Particulars  Retained equipment Replace equipment Net income change

Variable cost  $1,560,000                  $1,230,000                $330,000

             ($520,000 × 3 years)      ($410,000 × 3 years)

New machine cost                             $300,000                -$300,000

Net change                                                                   $30,000

So based on the analysis the old machine should be replaced

Therefore we considered all the information given in the question