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Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. 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 $26,000 to $23,500 if the new machine is purchased. The total net differential increase or decrease in cost for the new equipment for the entire five years is a. increase of $11,000 b. decrease of $15,000 c. decrease of $11,000 d. increase of $15,000

Respuesta :

Answer:

The net differential increase in cost for new equipment for the five year is A) INCREASE OF $11,000.

Explanation:

Given book value  =  $12,500,  with remaining life of five years. This machinery can be sold for $1500.

While the purchase cost of new machinery is $25,000, it reduces the variable manufacturing cost for five years, which will be equal to -

($26,000 - $23,500) x 5

= $2500 x 5

= $12,500

The increase or decrease will be =

TOTAL COST(NEW) - REDUCED VARIABLE COST - OLD MACHINERY SOLD

$25,000 - $12,500 - $1500

= $11,000

THUS THERE IS AN INCREASE OF $11000 IN THE COST FOR NEW EQUIPMENT.

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