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Granfield Company has a piece of manufacturing equipment with a book value of $36,000 and a remaining useful life of fou...

Granfield Company has a piece of manufacturing equipment with a book value of $36,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $21,200. Granfield can purchase a new machine for $112,000 and receive $21,200 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,200 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Multiple Choice

  • $18,000 increase

  • $72,800 decrease

  • $14,800 decrease

  • $49,200 increase

  • $18,000 decrease

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Answer #1
Savings in total variable manufacturing costs 72800 =18200*4
Amount received from sale of old machine 21200
Purchase cost of new machine -112000
Net change in income -18000
Option E $18,000 decrease is correct
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