Answer:
Replacing the old machine would produce a net saving of $1,300
The sunk cost in this situation is the purchase cost (i.e $105,000) of the old machine.
Explanation:
<em>Differential Analysis</em>
Purchase cost of the new machine (83,000)
Savings from annual variable cost(8500×8) 68,000
Variable cost of running the new machine (5,000×8) (40,000)
Scrap value of the old machine <u> 56,300 </u>
Differential savings <u> 1,300 </u>
Replacing the old machine would produce a net saving of $1,300
The sunk cost in this situation is the purchase cost (i.e $105,000) of the old machine. It is a past cost incurred as a result old decision.
