Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

Machine Replacement Decision A company is considering replacing an old piece of

ID: 2517329 • Letter: M

Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $601,100 and has $351,200 of accumulated depreciation to date, with a new machine that costs $483,900. The old machine could be sold for $64,000. The annual variable production costs associated with the old machine are estimated to be $155,200 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,100 per year for eight years.

a. Prepare a differential analysis dated October 3, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

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

Machine Replacement Decision

b. What is the sunk cost in this situation?

The sunk cost is the $

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) October 3 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 $64000 $64000 Costs: Purchase price 0 483900 483900 Variable productions costs (8 years) 1241600 816800 424800 Income (Loss) $-1241600 $-1236700 $

Explanation / Answer

Answer:

Differential Analysis

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

3-Oct

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

64000

64000

Costs:

Purchase price

0

-483900

-483900

Variable productions costs
(8 years)

-1241600

-816800

424800

Total Cost

-1241600

-1300700

59100

Income (Loss)

-1241600

-1236700

4900

The company should replace the old machine

_________________________________

2

The book value of the old machinery is sunk cost as it is irrelevant

The sunk cost

=601100-351200

=$249,900

The sunk cost is the $ 249,900

Differential Analysis

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

3-Oct

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

64000

64000

Costs:

Purchase price

0

-483900

-483900

Variable productions costs
(8 years)

-1241600

-816800

424800

Total Cost

-1241600

-1300700

59100

Income (Loss)

-1241600

-1236700

4900

Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
Chat Now And Get Quote