Overland Company is considering replacing a machine that is presently used in the production of its product. The following data are available:
-The total relevant costs to consider if the old machine is kept are
A) $120,000.
B) $70,000.
C) $94,000.
D) $144,000.

Question

Overland Company is considering replacing a machine that is presently used in the production of its product. The following data are available: 
-The total relevant costs to consider if the old machine is kept are
A) $120,000. 
B) $70,000. 
C) $94,000. 
D) $144,000.

Quizplus · Accepted Answer

The relevant costs to consider if the old machine is kept are the annual operating costs of $40,000 and the salvage value of $30,000 when the machine is eventually disposed of. Therefore, the total relevant costs of keeping the old machine would be $70,000 ($40,000 + $30,000). If Overland Company chooses to replace the old machine with a new one, they would need to consider the cost of the new machine, which is $120,000. Since the total relevant costs of keeping the old machine are lower than the cost of purchasing a new one, it would be best for Overland Company to keep the old machine.

Overland Company Is Considering Replacing a Machine That Is Presently