Requirements Sam Anderson, the produdtion manager at Framingham Company, purchas

Question

Requirements Sam Anderson, the produdtion manager at Framingham Company, purchased a cuting machine or the company last year. Six months after the purchase of the cutting machine, Sam learmed (a) Should Sam Anderson replace the old machine with the new machine? Explain lising al nt about a new cutting machine that is more reliable than the machine that he purchased. The relevant oosts following information is available for the two machines (b) What costs should be considered as sunk costs for this decision? (c) What other factors may affect Andersont's decision? B(Click the ioon to view the data ) Requirement (a) Should Sam Anderson replace the old machine with the new machine? Explain, lishing all elevant costs Select the relevant oosts of purchasing a new machine, erder te nle art anout fred ter rd na etewwatn a hini show costs and a net additional cost Leave unused cells blank) at Mete r a Data Table Relevant amount oost cf new machin OLD MACHINE s 315.000 3 years S 9O,000 S 2.000 NEW MACHINE 330,000 3 years CATEGORY Salvage Solvage value of old machine after 3 years value of new machine after 3 years Remaining He Salvage value now costs over 3 5 5000 n cework costs d th Annual operating costs for the old machine are $140.000. The new machine will decrease annual opersting costs by $70,000. These amounts do not indlude any charpes for Cumulative cash savings additional costs) 52 Sam Anderson should keep the old machine becausewil result inr t depeecision Framingham Company uses the straight-ine depreciation method These estimates of operaling costs exclude rework costs. The new machine will also result in a reduction r, the defect rane from the oret e% to 1%AIdeletve ures are reworked at a oost of 31 per unit. The company, on average produces 110.000 units annualy oosts for this decisor Requirement (b) What costs should be considered Bunk costs Print Done se in the fii ose Choose fom any lst or enter ay number in the input felkds and thencotu 12 PM 3/18/2018

Explanation / Answer

Relevant Amount a) Net acquisition cost of new machine = 330000-90000 = $       2,40,000 Salvage value of new machine after 3 years $             2,000 Salvage value of old machine after 3 years $             5,000 Change in operating costs over 3 years = 70000*3 = $       2,10,000 Reduction in rework costs = 110000*5%*1*3 = $           16,500 Cumulative cash savings/(additional costs) $         -16,500 Sam Anderson should keep the old machine because it will result in lower cumulative cash costs. b) The acquisition cost of the old machine should be considered as sunk cost. c) Other factors that may affect Anderson's decision are: *tax effect on costs, salvage value and tax shield on depreciation. *time value of money.

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