A new $300,000 machine is expected to have a five-year life and terminal
value of zero. It can produce 40,000 units a year at a variable cost of $4 per unit.
The variable cost is $6 per unit with an old machine, which has a book value of
$100,000. It is being amortized on a straight-line basis at $20,000 per year. It too
is expected to have a terminal value of zero. Its current disposal value is also zero
because it is highly specialized equipment.
The salesperson of the new machine prepared the following comparison:

He said, “The new machine is obviously a worthwhile acquisition. You will
save $1 for every unit you produce.”
1. Do you agree with the salesperson’s analysis? If not, how would you
change it? Be specific. Ignore taxes.
2. Prepare an analysis of total and unit costs if the annual volume is
20,000 units. F
3. At what annual volume would both the old and new machines have
the same total relevant costs?

Units Variable costs Straight-line amortization Total cost Unit cost NEW MACHINE 40,000 $160,000 OLD MACHINE 40,000 $240,000 60,000 20,000 $220,000 $260,000 $5.50 $6.50