Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $602,200 and has $347,000 of accumulated depreciation to date, with a new machine that has a purchase price of $486,200. The old machine could be sold for $61,400. The annual variable production costs associated with the old machine are estimated to be $156,200 per year for eight years. The annual variable production costs for the new machine are estimated to be $99,600 per year for eight years. a. 1 Prepare a differential analysis dated September 13, 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) September 13 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine $ $ 61,400 $ 61,400 Costs: Purchase price -486,200 -486,200 Variable productions costs (8 years) Income (Loss)

Answer 1

Variable production costs of old machines = 156,200 x 8

= $1,249,600

Variable production costs new machine = 99,600 x 8

= $796,800

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 Effect on Income ( Alternative 2)
Revenues:
Proceeds from sale of old machine	0	61,400	61,400
Costs:
Purchase price	0	-486,200	-486,200
Variable productions costs ( 8 years)	-1,249,600	-796,800	452,800
Income	-$1,249,600	-$1,221,600	$28,000

Old machine should be replaced by the new machine.

b.

Sunk cost = $602,200

Sunk cost is the cost of old machine.

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