Relevant costs: replacement decision Syd Young, the production manager at LO 1 Fuchow Company, purchased a cutting machine for the company last year. Six months after the purchase of the cutting machine, Syd learned about a new cut¬ ting machine that is more reliable than the machine that he purchased. The fol¬ lowing information is available for the two machines:

Annual operating costs for the old machine are $140,000. The new machine will decrease annual operating costs by $60,000. These amounts do not include any charges for depreciation. Fuchow Company uses the straight-line deprecia¬ tion method. These estimates of operating costs exclude rework costs. The new machine will also result in a reduction in the defect rate from the current 5% to 2.5%. All defective units are reworked at a cost of $1 per unit. The company, on average, produces 100,000 units annually.
REQUIRED

(a) Should Syd Young replace the old machine with the new machine? Explain, listing all relevant costs.

(b) What costs should be considered as sunk costs for this decision?

(c) What other factors may affect Young's decision?

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CATEGORY Acquisition cost Remaining life Salvage value now Salvage value at the end of 4 years OLD MACHINE $300,000 4 years $100,000 NEW MACHINE $360,000 4 years - $ 4,000 $ 6,000