Answered: (a) Compute the income increase or…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $45,000 and a remaining useful life of five years. It can be sold now for $52,000. Variable manufacturing costs are $36,000 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	$ 115,000	$ 125,000
Variable manufacturing costs per year	19,000	15,000

(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?
(d) If the machine should be replaced, which new machine should Lopez purchase?

Machine A: Keep or Replace Analysis
Keep
Replace
Revenues
Income Increase
(Decrease) from
Replacing
Sale of existing machine
$
0
Costs
Purchase of new machine
Variable manufacturing costs
Income (loss)
$
0 $
55,000 $
55,000

Machine B: Keep or Replace Analysis
Keep
Replace
Revenues
Sale of existing machine
Costs
Purchase of new machine
Variable manufacturing costs
Income (loss)
Income Increase
(Decrease) from
Replacing
$
0 $
0 $
0

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