Image Maker, Inc., a public relations and influence management company, produces videos and short films for its acting and performing arts clients.

The Companys production equipment was acquired several years ago and has become inefficient, requires frequent repair and maintenance, and lacks modern features necessary for advanced production applications.

As a result, company management is considering replacing the old equipment.

Annual operating cost of the old equipment is $8,000 and annual repair and maintenance cost is $3,000. If Image Maker disposes of the old equipment, they will incur removal costs of $1,500, but they will receive $1,000 related to the equipments salvage value. In addition, the old equipments book value is $26,000, with annual depreciation expense of $5,000. If replaced, the book value will be written-off as a loss in the companys income statement.

The cost of the new equipment is $45,000. The new equipments productive useful life is 5 years, its operating cost is $2,500 per year, annual depreciation expense is 9,000. At the end of its productive life, the new equipments disposal cost is $750, and it has no salvage value.

Additionally, if they acquire the new machine, Image will incur $2,000 of employee training costs and an $800 expense for delivery and setup costs.

Required

A. Using the information above, prepare a schedule analyzing the financial benefit or cost of replacing the old equipment.

B. Suggest 3 qualitative factors that should be considered in making this equipment replacement decision. The qualitative factors could be supportive of replacing or retaining the old equipment.

C. Considering the costs and benefits, give your recommendation to management regarding replacing the old equipment.

D. Assume that, if the company replaces the old equipment, their productivity will improve significantly resulting in: a. $12,000 in additional sales resulting in a $7,500 increase in contribution margin, b. $3,500 of additional fixed costs, mainly for advertising, and c. The vendor of the new equipment waives the delivery and setup costs and provides employee training gratis, i.e., for free. Given this additional information, prepare a revised analysis of the financial benefit or cost associated with replacing the old equipment.

E. Considering your revised analysis, give management your replacement recommendation.