Holmes Company has a factory machine with a book value of $89,851 and a remainin

Question

Holmes Company has a factory machine with a book value of $89,851 and a remaining useful life of 4 years. A new machine is available at a cost of $815,275. This machine will have a 4-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $620,925 to $425,840.

Instructions: Prepare an analysis showing whether the old machine should be retained or replaced.

Retain Equipment

Replace Equipment

Total costs

The equipment should be _______________ because total costs are lower than to retain the machine.

Retain Equipment

Replace Equipment

Total costs

Explanation / Answer

Retain Equipment Replace Equipment Net Purchase Cost 0 725424 Total Variable Manufacturing Cost 2483700 1703360 Total costs 2483700 2428784 The equipment should be Replaced because total costs are lower than to retain the machine.

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