Warsaw Products has a factory machine with a book value of $90,000 and a remaini

Question

Warsaw Products has a factory machine with a book value of $90,000 and a remaining useful life of 4 years. A new machine is available at a cost of $250,000. This machine will have a 4-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $600,000 to $500,000. Prepare an analysis showing whether the old machine should be replaced or retained. (1) Explain how the analysis is to be performed (10 points) and (2) Show all computations required to arrive at the correct answer. (20 points).

Explanation / Answer

Margin of Safety = Expected (or) Actual Sales Level (quantity or dollar amount) - Breakeven sales Level (quantity or dollar amount) [Margin of Safety = Margin of safety in dollars / Total budgeted or actual sales] a 1,200,000 - 840,000 = 360,000 b 360,000 / 1,200,000 = 30%

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