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Le Journee Company is considering replacing a factory machine with a new machine
Le Journee Company is considering replacing a factory machine with a new machine. Le Journee Company has a factory machine that originally cost $150,000. It has a balance in Accumulated Depreciation of $110,000, so its book value is $40,000. It has a remaining useful life of three years. The company is considering replacing this machine with a new machine. A new machine is available that costs $170,000. It is expected to have zero salvage value at the end of its four-year useful life. If the new machine is acquired, variable manufacturing costs are expected to decrease from $105,000 to $60,000 and the old unit could be sold for $5,000. How much is the difference of total variable manufacturing costs between the option of retaining an old machine and buying a new machine? Answer: How much is the net income increase/decrease (please also consider the gain from selling the old machine)? Please give the number and explanation whether it is a decrease or increase. Answer: Will Le Journee Company retain the old machine? Answer:
Expert Solution
if we Retain old machine if we Replace with new machine
Variable Manufacturing cost
old =105000*3
new = 60000*4
$315000 $ 240000 $75000
New machine cost 0 $ 170000 -170000
Sell old machine 0 -5000 5000
Total 315000 405000 -90000
1) if we retain old machine - we have given the old machine remaing life is 3 years , so in this 3 years we have to spend 315000 on variable manufacturing cost ,
and if we replace it with new machine - we have given new machine life is 4 years - in 4 years er have to spend 240000 on variable manufacturing cost = so the diffrence is $ 75000 inflow if replace new machine.
2) in above given chart the cost will increase by $ 90000 if we replace the machine . so the income will decreses by 90000.
3) yes co. will retain the old machine
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