Question

A company is considering replacing an old piece of machinery, which cost $601,300 and has $350,900 of accumulated depreciation to date, with a new machine that has a purchase price of $483,600. The old machine could be sold for $64,500. The annual variable production costs associated with the old machine are estimated to be $156,700 per year for 8 years. The annual variable production costs for the new machine are estimated to be $101,400 per year for 8 years.
Required:
A. Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B. Determine whether the company should continue with (Alternative 1) or replace (Alternative 2) the old machine.
C. What is the sunk cost in this situation?
X
Differential Analysis
A company is considering replacing an old piece of machinery, which cost $600,000 and has $350,000 of accumulated depreciation to date, with a new machine that has a purchase price of $545,000. The old machine could be sold for $231,000. The annual variable production costs associated with the old machine are estimated to be $61,000 per year for eight years. The annual variable production costs for the new machine re estimated to be $19,000 per year for eight years.
Required:
A. Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B. Determine whether the company should continue with (Alternative 1) or replace (Alternative 2) the old machine.
C. What is the sunk cost in this situation?
X
Differential Analysis
A. Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
Differential Analysis
Continue with Old Machine (Alternative. 1) or Replace Old Machine (Alternative. 2)
September 13
1
Continue with Old Machine
Replace Old Machine
Differential Effect on Income
2
(Alternative 1)
(Alternative 2)
(Alternative 2)
3
4
5
6
7
8

Answer 1

Answer:

Question Aa. Alternative 1–$1,253,600

Alternative 2 –$1,230,300

Differential effect $ 23,300

b.The company should replace the old machine.

c Sunk cost $250,400

Question Ba. Alternative 1–$488,000

Alternative 2 –$466,000

Differential effect $ 22,000

b.The company should replace the old machine.

c Sunk cost $250,000

Explanation:

Question Aa. Preparation of a differential analysis dated September 13

DIFFERENTIAL ANALYSIS

Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)

September 13

Continue with Old Machine (Alternative 1); Replace Old Machine (Alternative 2) ; Differential

on Income (Alternative 2)

Revenues:

Proceeds from sale of old

machine $ 0 $64,500 $64,500

Costs:

Purchase price 0 –$483,600 –$483,600

Variable production costs (8 years)–$1,253,600 –$811,200 $442,400

($156,700*8=$1,253,600)

($101,400*8=$811,200)

Income (Loss) –$1,253,600 –$1,230,300 $ 23,300

b. The company should replace the old machine.

c. Calculation for The sunk cost

Using this for formula

Sunk cost= Book value- Accumulated

depreciation

Let plug in the formula

Sunk cost=$601,300-$350,900

Sunk cost=$250,400

Question Ba. Preparation of a differential analysis dated September 13

DIFFERENTIAL ANALYSIS

Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)

September 13

Continue with Old Machine (Alternative 1); Replace Old Machine (Alternative 2) ; Differential

on Income (Alternative 2)

Revenues:

Proceeds from sale of old

machine $ 0 $231,000 $231,000

Costs:

Purchase price 0 –$545,000 –$545,000

Variable production costs (8 years)–$488,000 –$152,000 $336,000

($61,000*8=$488,000)

($19,000*8=$152,000)

Income (Loss) –$488,000 –$466,000 $ 22,000

b. The company should replace the old machine.

c. Calculation for The sunk cost

Using this for formula

Sunk cost= Book value- Accumulated

depreciation

Let plug in the formua

Sunk cost=$600,000-$350,000

Sunk cost=$250,000