Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 23

Williams Auto has a machine that installs tires. The machine now is in need of repair. The machine originally cost $10,000 and the repair will cost $1,000, but the machine will then last two years. The variable (labor) cost of operating the machine is $0.50 per tire. Instead of repairing the old machine, Williams could buy a new machine at a cost of $5,000 that would also last two years; the labor cost per tire would be reduced to $0.25 per tire. Should Williams repair or replace the machine if it is installing 10,000 tires in the next two years?

Step 1 of 4

Decision of either to repair or replace the machine:

The decision of either to repair or replace the machine is determined by comparing the total cost that is to be incurred for repairing the machine and total cost that is to be incurred for replacing the machine.