Irina has just been hired as CEO of a small manufacturing firm, Work Gear, located in Kamloops, BC. Work Gear has gone through some major problems the last few years, so the plant was sold, and the new owner, Marla, is putting together an experienced management team. Prior to accepting Marlas offer, Irina requested assurance that she would have a say in the selection of the CFO and was granted it. She has since asked Marla to hold off on interviewing CFO candidates until she gets to read a detailed report from you, a talented group of MBA students.

Marla estimates that each product takes an equal time to make, even though the vests contain more leather. From looking at sales data, she has determined that demand for the vests is highest during the spring and fall seasons, while the toolbelts tend to be sold evenly through the year. Overall, the annual demand for the products is roughly the same, which matches production. Marla is wondering if the current level-production model is efficient or if there might be a better way to produce the goods. A large machine has been deemed to be a fire hazard by regulators. Fixing it would cost $20,000 and keep the machine working for an estimated three additional years. However, the machine could also be scrapped for a cash refund of $2,000. The business can then purchase a new $180,000 machine which would cut current maintenance and repairs expenses by 10%. The new machine would have an expected useful life of twelve years, with a scrap value of $2,000. Irina needs advice on the accounting treatment of an asset like this.