Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $602,600 and has $347,900 of accumulated depreciation to date, with a new machine that has a purchase price of $484,000. The old machine could be sold for $64,400. The annual variable production costs associated with the old machine are estimated to be $155,900 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,500 per year for eight years.

a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	$	$	$
Costs:
Purchase price
Variable productions costs (8 years)
Income (Loss)	$	$	$

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

b. What is the sunk cost in this situation?

The sunk cost is $.

Answer 1

Differential Analysis
	Continue with old machine	Replace old machine	Differential Effects
	(Alternative 1)	(Alternative 2)
Revenues:
Proceeds from sale of old machine	$                                                             -	$                                      64,400	$                                       64,400
Costs:
Purchase Price	$                                                             -	$                                    484,000	$                                     484,000
Variable Production Costs(8 Years)	$                                                1,247,200	$                                    820,000	$                                   -427,200
Income / (Loss)	$                                               -1,247,200	$                                -1,239,600	$                                         7,600
Since the Loss in continue with the Replacing machine is less than the loss in continuing with the old machine, Hence the company should REPLACE WITH OLD MACHINE
In this situation SUNK cost is the cost of old machine which is $602,600