Question

1. Machine Replacement Decision

   A company is considering replacing an old piece of machinery, which cost $597,600 and has $352,200 of accumulated depreciation to date, with a new machine that has a purchase price of $484,300. The old machine could be sold for $63,200. The annual variable production costs associated with the old machine are estimated to be $156,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,500 per year for eight years.

   a. Prepare a The area of accounting concerned with the effect of alternative courses of action on revenues and costs.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)	$	$	$

   Feedback

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

   • Continue with the old machine
   • Replace the old machine

   Feedback

   b. What is the sunk cost in this situation?

   The sunk cost is $.

Answer 1

Answer to part (a)

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
	Continue with the Old Machine	Replace the old Machine	Differential Impact on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues	-	-	-
Proceeds from sale of Old Machine		63200	63200
Costs:
Purchase Price		-484300	-484300
Variable production cost (8 years)	-1248000	-812000	436000
Income (Loss)	-1248000	-1233100	14900

Our Income will Increase by $14900 if we replace the old machinery with the new one. This increase is due to saving in the variable production cost.

The saving would be even higher if we consider interest factor for the same.

Answer to part (b)

Sunk cost is the cost which has already been incurred and does not affect our decision making process, in the present case sunk cost is the difference between the written down value of asset and its net realizable value:

Statement showing calculation of sunk cost
Machinery (At cost)	597600
Less: Accumulated depreciation	352200
Written down value of Machinery	245400
Less: Realizable value	63200
Sunk cost	182200

Please let me know in case of any doubts or any clarification is required.