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Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $47,000 and a remaining useful life of five years. It can be sold now for $57,000. Variable manufacturing costs are $47,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years.
Machine A Machine B
Purchase price$ 118,000$ 131,000
Variable manufacturing costs per year21,000 14,000
(a) Compute the income increase or decrease from replacing the old machine with Machine A.
(b) Compute the income increase or decrease from replacing the old machine with Machine B.
(c) Should Lopez keep or replace its old machine

Respuesta :

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a) The income increase from replacing the old machine with Machine A is $21,800 ($56,400 - $44,600 + $10,000).

b) The income increase from replacing the old machine with Machine B is $26,200 ($56,400 - $40,200 + $10,000).

c) The Lopez Company should replace its old machine, preferably with Machine B.

Data and Calculations:

Current selling price =$57,000

Gain from the sale of old machine = $10,000 ($57,000 - $47,000)

                                                  Old Machine    Machine A     Machine B

Book value                                     $47,000

Purchase price                                                    $118,000        $131,000

Variable manufacturing costs        47,000           21,000            14,000

Estimated remaining useful life    5 years           5 years          5 years

Fixed costs per year                      $9,400        $23,600        $26,200

Total costs (variable + fixed)       $56,400        $44,600        $40,200

Comparative income increase       $0                $11,800         $16,200

Total income increase                    $0               $21,800        $26,200 ($16,200 + $10,000)

Thus, it is economically better for Lopez to sell its old machine, replacing it with Machine B, which reduces the total costs per year.

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