Kobe Company has a factory machine with a book value of $86,100 and a remaining
ID: 2415734 • Letter: K
Question
Kobe Company has a factory machine with a book value of $86,100 and a remaining useful life of 5 years. It can be sold for $25,770. A new machine is available at a cost of $254,040. This machine will have a 5-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $755,130 to $625,730. Prepare an analysis showing whether the old machine should be retained or replaced. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Explanation / Answer
Answer:
It is advisable to replace the Old machine with the new machine.
Purchase price of the new machine $ 254,040.
Reduction in Variable Manufacturing Cost $129,400($755,130-$625,730)
Total savings in Variable manufacturing cost in 5 years=5*$129,400
=$647,000
Total benefits due to purchase of new macine in Five years= Savings in Variable Manufacturing cost-Purchase price of the new machine.
=$647,000-$254,040
=$392,960.
If the Old machine continues, Additinal Variable manufacturing cost=$647,000
So it is advisable to replace the old machine with new one.
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