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Bernsteen Co is considering disposing of a machine with a book value of $120,000 and estimated...

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Bernsteen Co is considering disposing of a machine with a book value of $120,000 and estimated remaining life of five years. 

The old machine can be sold for $75,000

New machine, high speed, can be purchased for $200,000

New machine-useful life, 5 years; $90,000 residual value

Variable costs, old machine: $250,000 annually

Variable costs, new machine: $180,000 annually

The difference in variable costs is related to lower labor costs

a) What is the net differential increase or decrease in cost associated with buying the new machine? Show answer in this format, with ALL supporting work shown below your final answer $ _____ in favour of _____.

b) List the Quantitative factors which might be missing from this problem, and indicate how they would influence your answer (in favoUr of Keep or Buy New)

1._____

2._____

3._____

c. List the Qualitative factors which might influence your decision to Keep or Buy New

1._____

2._____

3._____

Variable Cost:

Cost is said to be variable due to variation in the cost of producing goods and services, which is the total of the marginal cost of goods produced. Variable cost and fixed together with help in generating the total cost of products and services.

Answer and Explanation:

Calculation of depreciation of the old machine_

Depreciation = ( Book Value -Salvage Value) / No. Of Years of useful life

= (120000-750000)/5

=9000

_Calculation of depreciation of the new machine_

Depreciation = ( Book Value - Salvage Value) / No. of years of useful life

= (200000-90000)/5

=22000

Particulars Amount
Depreciation 9000
Variable Cost 250,000
Total Cost 2,59,000
Total Cost of new machine
Depreciation 22000
Variable Cost 180,000
Total Cost 2,02,000

a) The net differential decrease in cost that is linked with the purchase of a new machine = $ 57,000 annually.

b) The list of Quantitative factors

i) To know the impact of the new machine on the products which help in knowing the extra unit that produces machines.

ii) For knowing the new machinery that uses different and less cost of raw material.

iii) By using the new machine labor hours decreases.

c) The list of Qualitative factors to keep new machine are:

i) The use of a new machine is safe than using old machines.

ii) The new machine can be more environmentally friendly.

iii) The maintenance of product quality or increased by using the new machine.


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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