A company is considering replacing an old piece of machinery, which cost $617,500 and has $359,600 of accumulated depreciation to date, with a new machine that has a purchase price of $573,500. The old machine could be sold for $250,500. The annual variable production costs associated with the old machine are estimated to be $61,050 per year for eight years. The annual variable production costs for the new machine are estimated to be $18,150 per year for eight years.

Required:

A.

Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

B.

Determine whether the company should continue with (Alternative 1) or replace (Alternative 2) the old machine.

C.

What is the sunk cost in this situation?

Labels

Cash flows from investing activities

Costs

Revenues

Amount Descriptions

Gain on sale of investments

Income (loss)

Loss on sale of investments

Proceeds from sale of old machine

Purchase price

Variable production costs (8 years)

A. Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Differential Analysis

Continue with Old Machine (Alternative. 1) or Replace Old Machine (Alternative. 2)

September 13

1		Continue with Old Machine	Replace Old Machine	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
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