Lesson: Incremental Analysis

Problem: The DAA & A Company is a construction company. On August 01, the company is considering to replace one of the bulldozers with a new one. The Old Bulldozer was bought on 2015 at P2,500,000 with an accumulated depreciation of P750,000. The remaining useful life of the Old Bulldozer is six years. Based on the canvassed of prices, there is an available bulldozer in the amount of P2,600,000 with a useful life of 10 years, and zero salvage value. If the new bulldozer is acquired, the operating cost is expected to decrease from P280,000 to P130,000. The old bulldozer can be sold for P1,500,000 on as-is-where-is basis. Required: Prepare an incremental analysis whether to retain or replace the equipment to answer the following questions: 1. How much variable cost to be considered in retaining the old bulldozer? 2. How much variable cost to be considered in replacing the old bulldozer? 3. How much is the net costs in retaining the old bulldozer? 4. How much is the net costs in replacing the old bulldozer? 5. How much is the difference in net costs between retaining and replacing the bulldozer? 6. What is the incremental analysis decision? (Write Retain or Replace in your answer.)