Question

QUESTION 2 The Westcoast Company produces footballs and currently uses a machine that could be sold in the market for $15,000. The current annual variable expenses are $80,000 for machine running costs and the current machine has a remaining useful life of 5 years. The original cost of the current machine was $72,000 and the remaining book value is $60,000. A replacement machine would cost the company $90,000 and annual variable expenses for running the machine would be $100,000. The new machine also has an expected future life of 5 years. Sales are expected as $200,000 per year with the old machine and $250,000 per year with the new replacement. Fixed costs other than depreciation are $70,000 per year in both cases (ignore the time value of money). Which of the following statement is correct?

a. The manager should replace the old machine because the net benefit is $87,000.

b. The manager should replace the old machine because the net benefit is $75,000.

c. The manager should keep the old machine because the net benefit is $57,000.

d. The manager should replace the old machine because the net benefit is $45,000.

e. The manager should keep the old machine because the net benefit is $45,000.

Answer 1

Correct Option B
	Old Machine	New Machine	Net Benefit from new machine
Sales Value Total	1,000,000	1,250,000
Less: Total Variable cost	400,000	500,000
Total Contribution per machine	600,000	750,000
Fixed cost	(70,000)	(70,000)
Cost of New Machine		(90,000)
Selling price of old machine		15,000
Net Income	530,000	605,000	75,000