Managerial Accounting Memo

We are often asked to write a memo to communicate with internal and external professionals in a business setting. To further advance your learning of memo communication, this written case requests that you prepare a memo to communicate within the company.

Background:

As the Controller at your company, the CFO has asked you to evaluate whether a piece of factory equipment should be replaced or kept.

The old factory equipment was purchased four years ago for $925,000. Over the last four years, your company has allocated depreciation based on the straight-line method. The expected salvage value is $35,000. The current book value of the factory equipment is $620,000. The operating expenses total approximately $40,000 a year. It is estimated that the residual value (market value) of the old machine is $355,000.

The CFO is contemplating whether to replace the piece of factory equipment. The replacement factory equipment would have a purchase price of $520,000, a useful life of eight years, a salvage value of 45,000, and annual operating costs of $35,000.

In consideration of the background, I’d like you to prepare a memo in a Word document to submit to the CFO (you name the person). Your first paragraph would be an introduction paragraph of the memo. Next, you will want to consider the equipment replacement decision. To add clarity to your discussion, you can insert a table comparing old and new equipment. Finally, in evaluating the “relevant” costs, what does your analysis show? Do you recommend replacing the equipment or keeping ongoing for the next eight years? Why or why not?