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Starling Co. is considering disposing of a machine with a book value of $21,700 and estimated...

Starling Co. is considering disposing of a machine with a book value of $21,700 and estimated remaining life of five years. The old machine can be sold for $6,000. A new high-speed machine can be purchased at a cost of 70,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $22,800 to $20,400 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is

increase of $52,000

decrease of $67,600

increase of $67,600

decrease of $52,000

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Answer #1

The Differential Increase in Depreciation over the period of 5 Years = (Value of New Machine - Value of Old Machine - Sale value today of old Machine ) = ($ 70,000 - $ 21,700) = $ 48,300

If new machine is installed then old machine has to be sold off at $ 6,000 where the Book Value of Machine is $ 21,700, hence resulting in a loss of $ 15,700

The Differential reduction in variable manufacturing costs per Year = $ 22,800 - $ 20,400 = $ 2,400

Therefore decrease in Varibale Manufacturing Costs over a period of 5 Years = $ 2,400 * 5 years = $12,000

Hence Net differential impact on profit = - $48,300 - $15,700 + $12,000 = -$ 52,000

ANSWER :- The Differential effect on Income for the new machine for the entire five years is decrease of $ 52,000

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