Machine replacement decision A company is considering replacing an old piece of machinery, which cost $600,800 and has $349,300 of accumulated depreciation to date, with a new machine that has a purchase price of $484,500. The old machine could be sold for $62,400. The annual variable production costs associated with the old machine are estimated to be $156,100 per year for 8 years. The annual variable production costs for the new machine are estimated to be $101,700 per year for 8 years. a.1 Prepare a differential analysis dated December 10 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 (Alt. 1) or Replace (Alt. 2) Old Machine Line Item Description December 10 Continue with Old Machine (Alternative 1) Replace Old Machine Differential Effects (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine Costs: 62,400 62,400 Purchase price 484,500 -484,500 Variable productions costs (8 years) 1,248.800 813,600 -435.200 Profit (loss) -1,248,800 -1,235,700 13,100 Feedback ▼Check My Work 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. a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Replace the old machine Feedback Check My Work 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 $435,200 X
Machine replacement decision A company is considering replacing an old piece of machinery, which cost $600,800 and has $349,300 of accumulated depreciation to date, with a new machine that has a purchase price of $484,500. The old machine could be sold for $62,400. The annual variable production costs associated with the old machine are estimated to be $156,100 per year for 8 years. The annual variable production costs for the new machine are estimated to be $101,700 per year for 8 years. a.1 Prepare a differential analysis dated December 10 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 (Alt. 1) or Replace (Alt. 2) Old Machine Line Item Description December 10 Continue with Old Machine (Alternative 1) Replace Old Machine Differential Effects (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine Costs: 62,400 62,400 Purchase price 484,500 -484,500 Variable productions costs (8 years) 1,248.800 813,600 -435.200 Profit (loss) -1,248,800 -1,235,700 13,100 Feedback ▼Check My Work 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. a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Replace the old machine Feedback Check My Work 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 $435,200 X
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Machine replacement decision
A company is considering replacing an old piece of machinery, which cost $600,800 and has $349,300 of accumulated depreciation to date, with a new machine that has a purchase price of $484,500. The old machine could be sold for $62,400. The annual
variable production costs associated with the old machine are estimated to be $156,100 per year for 8 years. The annual variable production costs for the new machine are estimated to be $101,700 per year for 8 years.
a.1 Prepare a differential analysis dated December 10 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 (Alt. 1) or Replace (Alt. 2) Old Machine
Line Item Description
December 10
Continue with
Old Machine
(Alternative 1)
Replace Old Machine Differential Effects
(Alternative 2)
(Alternative 2)
Revenues:
Proceeds from sale of old machine
Costs:
62,400
62,400
Purchase price
484,500
-484,500
Variable productions costs (8 years)
1,248.800
813,600
-435.200
Profit (loss)
-1,248,800
-1,235,700
13,100
Feedback
▼Check My Work
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.
a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
Replace the old machine
Feedback
Check My Work
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 $435,200 X
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