Machine Replacement Decision A company is considering replacing an old piece of
ID: 2517329 • Letter: M
Question
Machine Replacement Decision
A company is considering replacing an old piece of machinery, which cost $601,100 and has $351,200 of accumulated depreciation to date, with a new machine that costs $483,900. The old machine could be sold for $64,000. The annual variable production costs associated with the old machine are estimated to be $155,200 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,100 per year for eight years.
a. Prepare a differential analysis dated October 3, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.
Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
Replace the old machine
Machine Replacement Decision
b. What is the sunk cost in this situation?
The sunk cost is the $
Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) October 3 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine $0 $64000 $64000 Costs: Purchase price 0 483900 483900 Variable productions costs (8 years) 1241600 816800 424800 Income (Loss) $-1241600 $-1236700 $Explanation / Answer
Answer:
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
3-Oct
Continue with
Old Machine (Alternative 1)
Replace Old Machine (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine
0
64000
64000
Costs:
Purchase price
0
-483900
-483900
Variable productions costs
(8 years)
-1241600
-816800
424800
Total Cost
-1241600
-1300700
59100
Income (Loss)
-1241600
-1236700
4900
The company should replace the old machine
_________________________________
2
The book value of the old machinery is sunk cost as it is irrelevant
The sunk cost
=601100-351200
=$249,900
The sunk cost is the $ 249,900
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
3-Oct
Continue with
Old Machine (Alternative 1)
Replace Old Machine (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine
0
64000
64000
Costs:
Purchase price
0
-483900
-483900
Variable productions costs
(8 years)
-1241600
-816800
424800
Total Cost
-1241600
-1300700
59100
Income (Loss)
-1241600
-1236700
4900
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