Gurnee Company is considering the replacement of a machine that is presently used in production.The following data are available:
$$\begin{array} { l l l l }
\text { Original cost } & \$ 200,000 & \$ 160,000 \
\text { Wseful life in years } & 10 & 5 & \
\text { Current age in years } & 5 & 0 & \
\text { Fook value } & \$ 100,000 & - \
\text { Disposal value now } & \$ 32,000 & 0 & \
\text { Disposal value in } 5 \text { years } & 0 & \$ 14,000
\end{array}$$
Adding all five years together,what is the difference in total relevant costs between the old and new machines?
A) $12,000
B) $30,000
C) $98,000
D) $130,000

Question

Gurnee Company is considering the replacement of a machine that is presently used in production.The following data are available:
$$\begin{array} { l l l l } 
\text { Original cost } & \$ 200,000 &  \$ 160,000 \
\text { Wseful life in years } & 10 & 5 & \
\text { Current age in years } & 5 & 0 & \
\text { Fook value } & \$ 100,000 &  - \
\text { Disposal value now } & \$ 32,000 & 0 & \
\text { Disposal value in } 5 \text { years } & 0 & \$ 14,000
\end{array}$$
Adding all five years together,what is the difference in total relevant costs between the old and new machines?
A) $12,000
B) $30,000
C) $98,000
D) $130,000

Quizplus · Accepted Answer

The difference in total relevant costs between the old and new machines can be calculated by considering the costs that would change if the old machine is replaced by the new one. These include the disposal value now, the cost of the new machine, the disposal value in 5 years, and the book value of the old machine that would be written off if it's disposed of now.1. Disposal of the old machine now would bring in $32,000.2. Buying the new machine would cost $160,000.3. The old machine's book value that would be written off is $100,000.4. The new machine would have a disposal value of $14,000 in 5 years, which is a future benefit compared to the old machine having no disposal value in 5 years.The net cost to replace the old machine with the new one is calculated as follows:- Cost of new machine: $160,000- Less disposal value of old machine now: $32,000- Plus loss of disposal value of the old machine in 5 years (since it's $0 for the old machine, this is effectively a $0 change when considering the $14,000 disposal value of the new machine as a future benefit, not a cost)- The book value of the old machine that would be written off if it's disposed of now is not a cash flow and thus not directly relevant to the calculation of relevant costs for decision-making purposes. However, it's important to note that this is a sunk cost and does not affect the decision.Therefore, the relevant cost difference is the cost to buy the new machine minus the disposal value of the old machine, which is $160,000 - $32,000 = $128,000. However, this calculation does not directly match any of the provided options, indicating a need to reconsider the approach based on the provided options and the typical considerations for relevant costing in decision-making.Given the options and the typical approach to calculating relevant costs (which focuses on future cash flows), the correct calculation should focus on the costs and savings directly associated with the decision to replace the machine, including the disposal values and the cost of the new machine. The initial calculation made an error by not properly accounting for all relevant cash flows, including the savings or costs avoided by not having to dispose of the new machine in 5 years (which would be a benefit of $14,000 not directly subtracted in the calculation).The correct approach to find the difference in relevant costs should compare:- The cost of keeping the old machine (including any costs of not disposing of it now and the lost opportunity of the disposal value) versus- The cost of acquiring the new machine and any benefits associated with its disposal in the future.Given the discrepancy in the initial explanation and the need to align with the provided options, a reevaluation of the calculation method is necessary, focusing on the explicit costs and benefits associated with each option (old machine vs. new machine) over the relevant time period. The correct answer, based on the options provided and typical relevant cost considerations, would involve a detailed recalculation considering only those costs and benefits that directly impact the decision.

Gurnee Company Is Considering the Replacement of a Machine That