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Unformatted text preview: 11-1 CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION11-42Equipment replacement decisions and performance evaluation. 1. Operating income for the first year under the keep and replace alternatives are shown below: Denote the current direct manufacturing labor costs by $X and the current electricity costs by $Y. Year 1 Replace Keep Cost Difference by Replacing (1) (2) (3) = (1) (2) Cash operating costs Direct manufacturing labor $X$30,000 $ X $30,000 Electricity $Y$35,000 $ Y $35,000 Depreciation ($180,000 2; $60,000) $ 90,000 $ 60,000 +$30,000 Loss on disposal of old machine ($120,000 $72,000; $0) $ 48,000 $ 0 +$48,000 Total costs $ X + $Y $X + $Y +$ 73,000 +$60,000 +$13,000 First-year costs are lower by $13,000 under the keep machine alternative, and Bob Moody, with his one-year horizon and operating income-based bonus, will choose to keep the machine. 1.Based on the analysis in the table below, George Manufacturing will be better off by $22,000 over two years if it replaces the current equipment. $22,000 over two years if it replaces the current equipment....
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