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30 December, 13:42

Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000, and its remaining useful life is five years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of five years. Prepare a differential analysis. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. g

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  1. 30 December, 17:13
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    Answer and Explanation:

    According to the scenario, computation of the given data are as follow:-

    Present equipment - Annual variable cost = $4,000

    New equipment-Annual variable cost = $1,500

    Difference between new and present equipment cost = $2,500 ($4,000 - $1,500)

    Useful life years 5

    Total difference decrease between new and present equipment cost = (5 * $2,500) = $12,500

    Sales of present equipment = $2,000

    New equipment cost = $18,000

    Net annual difference increase in cost-new equipment = (18,000 - $2000)

    =$16,000

    According to the analysis, the net difference increase in cost is more than the total differential decrease in cost, so there is no benefit in replacement of equipment.
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