a) The income increase from replacing the old machine with Machine A is $21,800 ($56,400 - $44,600 + $10,000).
b) The income increase from <em>replacing the old machine</em> with Machine B is $26,200 ($56,400 - $40,200 + $10,000).
c) The Lopez Company <em>should replace its old machine</em>, preferably with Machine B.
Data and Calculations:
Current selling price =$57,000
Gain from the sale of old machine = $10,000 ($57,000 - $47,000)
Old Machine Machine A Machine B
Book value $47,000
Purchase price $118,000 $131,000
Variable manufacturing costs 47,000 21,000 14,000
Estimated remaining useful life 5 years 5 years 5 years
Fixed costs per year $9,400 $23,600 $26,200
Total costs (variable + fixed) $56,400 $44,600 $40,200
Comparative income increase $0 $11,800 $16,200
Total income increase $0 $21,800 $26,200 ($16,200 + $10,000)
Thus, it is economically better for Lopez to sell its old machine, replacing it with Machine B, which reduces the total costs per year.
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