Question

Nighthawk Inc. is considering disposing of an old machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The differential effect on income for the entire three years for the new machine is a(n) a. $8,750 decrease b. $8,750 increase c. $2,925 decrease d. $31,250 decrease

Answer 1

Answer:

b. $8,750 increase in income

Explanation:

The effect is a decrease in expense resulting to an increase in income

Lets compare the situation if the old machine was used and the if the new machine was used:

Old Machine

Costs: Variable manufacturing cost = $43,750 × 3 years = $131250

Benefits: None

Total differential cost to be incurred = $131,250

New Machine

Costs:

Purchase Cost: $68,750

Variable manufacturing cost = $20,000 × 3 years = $60,000

Total Cost = $128,750

Benefits:

Sales proceeds from Old Machine - $6,250

Total differential cost to be incurred = [$128,750 - $6,250] = $122,500

We can see that the cost incurred on the old machine is higher than the new machine.

Difference = [$131,250 - $122,500] = $8,750 increase in income

Answer 2

Answer:

b. $8,750 increase

Explanation:

Please see attachment