Ridley Company has a factory machine with a book value of $97,200 and a remainin

Question

Ridley Company has a factory machine with a book value of $97,200 and a remaining useful life of 5 years. A new machine is available at a cost of $203,300. This machine will have a 5-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $599,200 to $354,700.

Prepare an analysis showing whether the old machine should be retained or replaced. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.)

Explanation / Answer

Working

Retain Equipment

Variable Manufacturing Cost = 599200*5 = 2996000

Replace Equipment

Variable Manufacturing Cost =354700*5 = 1773500

Retain Equipment Replace Equipment Net 5 Year Income Increase (Decrease) Variable Manufacturing Cost 2996000 1773500 1222500 New machine Cost 0 203300 -203300 Total 2996000 1976800 1019200

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