Question

lopez company is considering replacing one of its old manufacturing machines. the old machine has a book value of $50,000 and a remaining useful life of four years. it can be sold now for $60,000. variable manufacturing costs are $44,000 per year for this old machine. information on two alternative replacement machines follows. the expected useful life of each replacement machine is four years. machine a machine b purchase price $ 120,000 $ 134,000 variable manufacturing costs per year 20,000 16,000 complete this question by entering your answers in the tabs below. req a req b req c and d compute the income increase or decrease from replacing the old machine with machine a. note: amounts to be deducted should be indicated with a minus sign. machine a: keep or replace analysis keep replace income increase (decrease) from replacing revenues sale of existing machine costs purchase of new machine variable manufacturing costs income (loss) $ 0 $ 0 $ 0

Explanation:

Step1: Calculate the revenue from selling the old machine

The old machine can be sold for $60,000. This is a revenue for the "Replace" option. So for the "Replace" column, the "Sale of existing machine" is $60,000.

Step2: Calculate the cost of purchasing the new machine (Machine A)

The purchase price of Machine A is $120,000. So for the "Replace" column, the "Purchase of new machine" is - $120,000.

Step3: Calculate the variable manufacturing costs

For the "Keep" option, variable manufacturing costs per year are $44,000 for 4 years. So total variable manufacturing costs for "Keep" is \(44000\times4=\$176,000\).
For the "Replace" option, variable manufacturing costs per year for Machine A are $20,000 for 4 years. So total variable manufacturing costs for "Replace" is \(20000\times4 = \$80,000\)

Step4: Calculate the income (loss) for each option

• Keep:

Revenues: \(0\) (no sale of machine in this option)
Costs: \(- 176000\)
Income (loss): \(0-176000=-\$176,000\)

• Replace:

Revenues: \(60000\)
Costs: \(-120000-80000=-200000\)
Income (loss): \(60000 - 200000=-\$140,000\)

Step5: Calculate the income increase (decrease) from replacing

Income (loss) if Replace: \(- 140000\)
Income (loss) if Keep: \(-176000\)
Income increase from replacing: \(-140000-(-176000)=36000\)

Answer:

Machine A: Keep or Replace Analysis	Keep	Replace	Income Increase (Decrease) from Replacing
Sale of existing machine	0	60000	60000
Costs
Purchase of new machine	0	- 120000	-120000
Variable manufacturing costs	-176000	-80000	96000
Income (loss)	-176000	-140000	36000

The income increase from replacing the old machine with Machine A is \(\$36,000\)