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Keeping a machine gives a loss of $126,000 and replacing it gives a loss of $143,000. What should the company do?
AReplace it, since the loss falls by $17,000
BReplace it, since the sale proceeds are $75,000
CKeep it, since its loss is $17,000 smaller
DKeep it, since the old cost of $200,000 is lost
Answer & Solution
Correct answer: C. Keep it, since its loss is $17,000 smaller
1. Neither option produces income, so the better choice is the one with the smaller loss.
2. $143,000 minus $126,000 gives a difference of $17,000.
3. The smaller loss belongs to keeping the existing machine.
4. The company should keep and operate the original equipment.
5. The $75,000 of sale proceeds is real, but it does not cover the $182,000 price of the replacement.
_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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