Keep or Replace Machine: Skiles Corporation is a manufacturer of classic rocking

ID: 2500728 • Letter: K

Question

Keep or Replace Machine: Skiles Corporation is a manufacturer of classic rocking chairs. The company has been using a particular sanding and finishing machine for over 10 years and believes that it may be time to replace the machine. The company is trying to decide whether replacing the old machine is a wise economic decision. The company's controller pulled together the following information on the old machine and the new possible replacement machine. Indicate which information below is relevant or irrelevant: Annual variable costs of old machine _____ Selling price of old machine _____ Matching lives _____ Purchase price of new machine _____ Accumulated depreciation of old machine _____ Create a differential analysis in Excel to decide whether to keep or replace the machine.

Explanation / Answer

Annual variable cost of old machine = relevant

Selling price of old machine= relevant

matching lives= irrelevant

purchase price of new machine= relevant

accumulated depreciation of old machine= irrelevant

Initial cost on new machine = 802700

Less- sale proceeds of old machine = 150500

Net expense in new machine 6552200

New

Old

Incremental

Initial cost

6552200

445600

206600

Incremental saving due to new machine (Assuming= inclusive of depreciation)

73900

48750

25150 * 6years

NET loss

55700

hence it is advise not to replace the machine

New

Old