Refer
to
the
previous
questions.
In
addition
to
the
information
provided
in
Questions
1
and
2,
now
suppose
that
the
product
that
the
new
machine
makes
is
expected
to
be
produced
for
only
three
more
years.
The
old
machine
is
expected
to
last for
three
additional
years,
but
the
new
machine
will
save
labor
cost
of
$3,000
per
year
over
the
next
three
years.
At
the
end
of
the
three
years,
both
machines
would
be
obsolete
and
would
have
no
expected
salvage
value.
Assuming
a
differential
analysis
approach,
determine
the
total
cost
associated
with
keeping
the
old
machine,
the
total
cost
of
buying
the
new
machine,
and
the
differential
cost
of
buying
the
new
machine.
Total
Cost
of
Total
Cost
of
Differential
Cost
of
Keeping
Old
Machine
Buying
New
Machine
New
Machine
a.
$14,000
$20,000
$(6,000)
b.
$14,000
$18,000
$(4,000)
c
$
3,000
$11,500
$(8,500)
d
$
-0-
$
9,500
$(9,500)
Answer:
d
Rationale:
The
total
relevant
cost
of
keeping
the
old
machine
is
zero,
because
its
cost
is
a
sunk
cost
and
is
not
relevant.
The
relevant
cost
of
acquiring
the
new
machine
is
the
acquisition
cost
of
$18,000
plus
the
opportunity
cost
of
$500,
less
the
$9,000
of
savings
over
the
next
three
years
in
labor
cost,
for
a
total
cost
of
$9,500.
