Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,700 and has $350,700 of accumulated depreciation to date, with a new machine that has a purchase price of $484,500. The old machine could be sold for $62,600. The annual variable production costs associated with the old machine are estimated to be $155,100 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,300 per year for eight years. a.1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) May 29 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effects (Alternative 2) Revenues: Proceeds from sale of old machine $ $ $ Costs: Purchase price Variable productions costs (8 years) Profit (Loss) $ $ $ a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. b. What is the sunk cost in this situation

Answer 1

Answer:

1.Incremental loss $300

2.Alternative II Replacing the Old Machine is beneficial because we have Incremental Profit of $300

2b.$250,000

Explanation:

1. Preparation of the differential analysis dated May 29

Differential Analysis

Continue with old machine (Alternative I ) or Replace old machine (Alternative II )

Continue with Replace the Differential effect

Old Machine Old Machine

Alternative 1 Alternative 2 Alternative 2

Revenue:

Revenue from Sale of Old Machine

$0 $62,600 $62,600

Cost:

Purchase Cost

$0 $484,500 $484,500

Variable Production (8 Years)

$1,240,000 $818,400 -$422,400

Profit / (Loss) ($1,240,000) ($1,240,300) -$300

Incremental loss = $300

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

Alternative II Replacing the Old Machine is not beneficial because we have Incremental loss of $300

2b. Calculation for the sunk cost in this situation

The Sunk Cost will be the Book Value of Old Machine = $600,700-$350,700

= $250,000

Variable production workings

($155,100×8=1,240,800)

($102,300×8= 818,400)