Differential Costs and Decision Making St. Mary Mills, Inc. (SMM) uses high-quality looms to manufacture its textile products. SMM has decided to replace one of its looms and has researched the following cost data on replacement looms. Using the following cost data, decide which alternative the company should pursue with respect to buying and operating a new piece of equipment. Use the differential-cost approach.

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Cost of new equipment Lifetime service and maintenance contract Resale value of old equipment Expected fixed operating costs Original cost of old equipment Severn Manufacturing $61,300 Old Mill Supplies $55,000 1,200 4,800 500 500 400 120 20,000 20,000