Holmes Company has a factory machine with a book value of $89,851 and a remainin
ID: 2503250 • Letter: H
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.