Widgets Inc. is thinking about replacing a piece of manufacturing equipment with

Question

Widgets Inc. is thinking about replacing a piece of manufacturing equipment with a remaining useful life of three years. The book value of the equipment is $25,000, and the machine could be sold in its current condition for $7,000. The new machine would cost $83,000 and would have no salvage value at the end of its three-year useful life. With the new machine, Widgets’ variable manufacturing costs would drop from $189,500 to $169,900 per year. If Widgets opts to buy the new machine

a. its total variable manufacturing costs over the next three years will be $58,800 lower than with the current machine.

b.  it will see a $58,800 increase in income over the next three years.

c.  it will be recording a loss of $25,000 on the current machine.

d.  it will see a $24,200 decrease in income over the next three years.

I think it is either a or b?

Explanation / Answer

Its total variable manufacturing costs over the next three years will be $58,800 lower than with the current machine 3*(189500-169900) Option A is correct

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