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Keeping an existing machine carries variable operating costs of $21,000 a year for the next six years. What is the result under the keep option?
AA loss of $126,000
BA loss of $143,000
CA loss of $182,000
DA loss of $107,000
Answer & Solution
Correct answer: A. A loss of $126,000
1. Keeping the machine brings in no revenue, so the option carries costs only.
2. Operating costs are $21,000 a year for six years.
3. $21,000 times 6 gives $126,000.
4. The keep option therefore shows a loss of $126,000.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.6 Keep or Replace a Fixed Asset_
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