Question

Rory Company has a machine with a book value of $75,000 and a remaining five-year useful life. A new machine is available at a cost of $112,500, and Rory can also receive $60,000 for trading in its old machine. The new machine will reduce variable manufacturing costs by $12,000 per year over its five-year useful life. Calculate the incremental income.

Answer 1

Answer: $7,500

Explanation:

In calculating the Incremental income we will add the amount of variable Manufacturing costs Rory Company will save as well as the income they will get from selling the old machine and then subtract the cost price of the new machine.

Starting off we will calculate the amount of savings they will make by using the new machine,

= $12,000 x 5 years

= $60,000

Calculating the Incremental income therefore we have,

= 60,000 + 60,000(from selling old machine) - 112,500 (cost of new machine)

= $7,500

The incremental income of buying the new machine is $7,500.

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