Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $597,000 and has $351,000 of accumulated depreciation to date, with a new machine that has a purchase price of $484,400. The old machine could be sold for $63,400. The annual variable production costs associated with the old machine are estimated to be $157,800 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,600 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 Continuewith OldMachine(Alternative 1) ReplaceOldMachine(Alternative 2) DifferentialEffects(Alternative 2) Revenues: Proceeds from sale of old machine $ $ $ Costs: Purchase price Variable productions costs (8 years) Profit (Loss) $ $ $ a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. b. What is the sunk cost in this situation? The sunk cost is$

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $597,000 and has $351,000 of accumulated depreciation to date, with a new machine that has a purchase price of $484,400. The old machine could be sold for $63,400. The annual variable production costs associated with the old machine are estimated to be $157,800 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,600 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	$	$	$
Costs:
Purchase price
Variable productions costs (8 years)
Profit (Loss)	$	$	$

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

b. What is the sunk cost in this situation?

The sunk cost is$

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