Question

Five years ago, Miller Manufacturing spent $150,000 on a new piece of industrial machinery. Six months ago, the firm spent $32,000 on upgrades to the machinery. Currently, Miller is considering whether to replace the existing machine with newer machinery with a purchase price of $180,000. When conducting the incremental analysis related to this decision, Miller should consider all of the following factors EXCEPTA) any salvage value associated with the new machinery.B) the cost of the upgrades to the old machinery. C) any salvage value associated with the old machinery. D) any differences in the variable costs associated with each piece of machinery.

Answer 1

Answer:

The answer is B

Explanation:

In Miller's decision-making process, he needs to recognize the costs and benefits that he will get from replacing the existing the current machinery with the new one and ignore all the cost that had happened (sunk cost) because has already incurred even if Miller chooses to replace or not to replace the current machine. In this case, it is the cost incurred to upgrade the current machine.

For option A, salvage value of the new machinery should be considered as it helps Miller estimates how much money he is going to recover after the machinery's useful life.

For C, salvage value of the current machinery should be considered as it helps Miller estimates how much he will get from selling this current machine as he disposes them to replace with the new one.

For D, Miller will need to know those the replacement result in any cost saving or cost increasing in the future which is part of the benefit or the cost of replacement.