Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $599,000 and has $349,300 of accumulated depreciation to date, with a new machine that has a purchase price of $483,600. The old machine could be sold for $63,300. The annual variable production costs associated with the old machine are estimated to be $158,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,400 per year for eight years.

a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	$	$	$
Costs:
Purchase price
Variable productions costs (8 years)
Income (Loss)	$	$	$

Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

b. What is the sunk cost in this situation?

The sunk cost is $.

Answer 1

A.

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine		63300	63300
Costs:
Purchase price	-	(483600)	(483600)
Variable manufacturing costs (8 years)	(1264000)	(803200)	460800
	($158000*8)	(100400*8)
Total costs	(1264000)	(1286800)	(22800)
Income (loss)			$40500

Company should replace (Alternative 2) the old machine.

B. The sunk cost is ($599,000 - $349,300) = $249700