Question

Course: Management and Cost Accounting

Question:

Consider the following data regarding Print Expert's photocopying requirements:

	Old Photocopier	Proposed Replacement Photocopier
Useful life, in years	5	3
Current age, in years	2	0
Useful life remaining, in years	3	3
Original cost	$25,000	$15,000
Accumulated depreciation	$10,000	$0
Book value	$15,000	Not acquired yet
Disposal value (in cash) now	$7,000	Not acquired yet
Disposal value in 3 years	$0	$0
Annual cash operating costs for power, maintenance, toner, and supplies	$14,000	$8,000

Required:

(a) Analyze in detail the relevant and irrelevant costs related to keeping or replacing the old photocopier.

(b) Advise the company on what it should do (keep or replace the old photocopier)? Please explain clearly why?

Note:

Hello! If you are not sure how to fulfill all the requirements needed, please do not attempt the question.

Your help is very much appreciated. Thank you.   

Answer 1

(a)

Original Cost and the Accumulated Depreciation on the Old Photocopier is the irrelevant cost in deciding whether to keep or replace photocopier.

Change in the operating cost and the sale value of old photocopier and purchase of new photocopier is the relevant cost.

Proposal to Replace Photocopier			Net Benefit
	Old Photocopier	Proposed Replacement Photocopier	Increase(Decrease)
Annual cash operating costs for power, maintenance, toner, and supplies	14,000	8,000
Number of years applicable	3	3
Total cost	42,000	24,000	-18,000
Proceeds from sale of present photocopier		7,000	7,000
Cost of new photocopier		15,000	15,000
Net Benefit (loss)			4,000

(b) Company should replace the old photocopier as they are getting a benefit of $4,000 by replacing the old photocopier.