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.

Question

Joyce Conrad

Business

3 February, 22:25

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.

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Answers (1)

Know the Answer?

Nathaniel Gibbs · 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