Answer:
Option A financial disadventage of 21,200
Option B financial advantage of 26,000
The company should go for alternative B
Explanation:
old A Differential
Purchase -119000 -119,000
Proceeds from sale 53,000 53,000
Variable cost -134,000 -89,200 44,800
Total -134000 -155200 -21,200
old B Differential
Purchase -117000 -117,000
Proceeds from sale 53,000 53,000
Variable cost -134,000 -44,000 90,000
Total -134000 -108000 26,000
<u>Notes:</u>
- The book value is irrelevant for this question.
- When going for either alternative we are selling the old machine at their fair value. So we have proceeds from the sale
- Then the variable cost of the old and each alternative are multiply by 4 becuase, that is the useful life of the machines in year.
- We add them all and check the difference
Alternative A has a negative differential income, so it is not viable
Alternative B has a positive differential income, it is viable.
