Tabitha Company is considering replacing a machine that is presently used in the production of its product. The following data are available: $\begin{array}{lll}&& \text { Replacement } \
&\text { Old Machine } & \text { Machine }\
\text { Origin al cost } & \$ 60,000 & \$ 35,000 \
\text { Useful lif in years } & 10 & 5 \
\text { Current age in years } & 5 & 0 \
\text { Book value } & \$ 25,000 & - \
\text { Disposal value now } & \$ \$, 000 & - \
\text { Disposal value in 5 years } & 0 & 0 \
\text { Annual cash operating costs } & \$ 10,000 & \$ 4,000
\end{array}$ The total relevant costs to consider if the old machine is kept are:
A) $50,000
B) $30,000
C) $52,000
D) $60,000

Question

Quizplus · Accepted Answer

The relevant costs if the old machine is kept include the disposal value now ($5,000) and the annual cash operating costs for 5 years ($10,000 x 5 = $50,000). Total relevant costs = $50,000 - $5,000 = $45,000. However, since the disposal value is not a cost but a benefit, the relevant cost is just the operating costs, which is $50,000.

Tabitha Company Is Considering Replacing a Machine That Is Presently