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Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. 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 $26,000 to $23,500 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is a(n) _______.

A.) decrease in $11,000B.) decrease of $15,000C.) increase of $11,000D.) increase of $15,000

Respuesta :

tanseershar

Answer:

A.) Decrease in $11,000

Explanation:

The Old machine Written down value is $12,500 and residual value is $1,500

So loss on old machine is $12,500-$1,500=$11,000

However annual depreciation on new machine is $25,000/5=2,500 which will reduce income as depreciation is an expense.

The savings in annual variable manufacturing costs is $26,000-$23,500=$2,500.The increase in depreciation expense of $2,500 offsets the savings in manufacturing costs of $2,500.Therefore no impact on income for both events.

Only loss on old machine will have negative impact of $11,000 on income

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