Question
A company is considering replacing an old piece of machinery, which cost $675,000 and has $380,000 of accumulated depreciation to date, with a new machine
A company is considering replacing an old piece of machinery, which cost $675,000 and has $380,000 of accumulated depreciation to date, with a new machine that has a purchase price of $825,000. The old machine could be sold for $300,000. The annual variable production costs associated with the old machine are estimated to be $85,000 per year for 8 years. The annual variable production costs for the new machine are estimated to be $25,000 per year for 8 years.
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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.
Line Item Description | Continue with Old Machine (Alternative 1) | Replace Old Machine (Alternative 2) | Differential Effects (Alternative 2) |
---|---|---|---|
Revenues: | |||
Proceeds from sale of old machine | $Proceeds from sale of old machine | $Proceeds from sale of old machine | $Proceeds from sale of old machine |
Costs: | |||
Purchase price | Purchase price | Purchase price | Purchase price |
Variable production costs (8 years) | Variable production costs (8 years) | Variable production costs (8 years) | Variable production costs (8 years) |
Profit (loss) | $Profit (loss) | $Profit (loss) | $Profit (loss) |
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a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
Continue with the old machineReplace the old machine
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b. What is the sunk cost in this situation? The sunk cost is fill in the blank 1 of 1$.
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