Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $49,000 and a remaining useful life of five years. It can be sold now for $59,000. Variable manufacturing costs are $42,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Machine A Machine B Purchase price $ 116,000 $ 129,000 Variable manufacturing costs per year 19,000 13,000 (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine

Respuesta :

a. The income increase or decrease from replacing the old machine with Machine A is $58,000.

b. The income increase or decrease from replacing the old machine with Machine B is $75,000.

c. Lopez company should choose "Alternative B" Machine.

a. Alternative A

Increase or decrease in net income - Lopez Company

Cost to buy new machine                           -$116,000

Cash received to trade in old machine        $59,000

Reduction in variable manufacturing cost  $115,000

[($42,000- $19,000)×5]

Total change in net income                          $58,000

b. Alternative B

Increase or decrease in net income - Lopez Company

Cost to buy new machine                           -$129,000

Cash received to trade in old machine        $59,000

Reduction in variable manufacturing cost   $145,000

[($42,000- $13,000)×5]  

Total change in net income                           $75,000

c. Lopez company should choose "Alternative B" Machine.

Inconclusion te income increase or decrease from replacing the old machine with Machine A is $58,000 and  Machine B is $75,000.

 

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