( I ONLY NEED TO KNOW WHAT THE SUNK COST IS)
A company is considering replacing an old piece of machinery, which cost $602,300 and has $353,000 of accumulated depreciation to date, with a new machine that has a purchase price of $487,000. The old machine could be sold for $63,300. The annual variable production costs associated with the old machine are estimated to be $156,100 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,900 per year for eight years.
a.1 Prepare a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.
Differential Analysis | |||
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) | |||
May 29 | |||
Continue with Old Machine (Alternative 1) |
Replace Old Machine (Alternative 2) |
Differential Effects (Alternative 2) |
|
Revenues: | |||
Proceeds from sale of old machine | $0 | $63300 | $63300 |
Costs: | |||
Purchase price | 0 | -487000 | -487000 |
Variable productions costs (8 years) | -1248800 | -807200 | 441600 |
Profit (Loss) | $-1248800 | $-1230900 | $17900 |
For the continue and replace alternatives subtract the costs from the revenues. Multiply the variable production costs for the eight year life. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.
Compare the differential revenues and differential costs of continuing vs. replacing. Which one has the greatest positive differential effect on income?
b. What is the sunk cost in this situation?
The sunk cost is $.
Ansb) A cost is sunk cost when they satisfy any one of the following condition:
i) If it is past/ historical cost .
ii) Future cost the obligation of which already has been decided
Sunk cost cannot effect the decision of decision of decision maker.
In the present case $602300 is the sunk cost because it was already incurred by a company in past years.
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