Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,200 and has $350,900 of accumulated depreciation to date, with a new machine that has a purchase price of $486,100. The old machine could be sold for $63,000. The annual variable production costs associated with the old machine are estimated to be $158,700 per year for eight years. The annual variable production costs for the new machine are estimated to be $100,200 per year for eight years. a. 1 Prepare a differential analysis dated May 29 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 Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) May 29 Continue Replace with Old old Differential Machine Machine Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine Costs: Purchase price Variable productions costs (8 years) Profit (Loss) Feedback a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Replace the old machine Feedback b. What is the sunk cost in this situation? The sunk cost is $ Differential Analysis for Machine Replacement Boyer Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $72,900, the accumulated depreciation is $29,200, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $151,600. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: Proposed Operations $231,100 $78,700 Sales Present Operations $231,100 $78,700 54,700 5,100 1,800 Direct materials Direct labor Power and maintenance Taxes, insurance, etc. , Selling and administrative expenses 27,000 6,100 54,700 54,700 Total expenses $195,000 $ 166,500 a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) May 4 Continue with Old Replace Differential Machine Old Machine Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Sales (5 years) $ Costs: Purchase price Direct materials (5 years) Direct labor (5 years) Power and maintenance (5 years) Taxes, insurance, etc. (5 years) Selling and admin. expenses (5 years) Profit (Loss)
