Question

Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $600,100 and has $350,100 of accumulated depreciation to date, with a new machine that has a purchase price of $486,500. The old machine could be sold for $61,200. The annual variable production costs associated with the old machine are estimated to be $157,500 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,000 per year for eight years. a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) April 29 Continue Replace Differential with Old Old Effect Machine Machine on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine Costs: Purchase price Variable productions costs (8 years) Income (Loss) Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. b. What is the sunk cost in this situation? The sunk cost is $1 Decision on Accepting Additional Business Brightstone Tire and Rubber Company has capacity to produce 162,000 tires. Brightstone presently produces and sells 124,000 tires for the North American market at a price of $88 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors, Euro is offering to buy 19,000 tires for $72.4 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows: Direct materials $33 Direct labor 12 Factory overhead (70% variable) 20 Selling and administrative expenses (30% variable) 18 Total $83 Brightstone pays a selling commission equal to 5% of the selling price on North American orders, which is included in the variable portion of the selling and administrative expenses. However, this special order would not have a sales commission. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $5 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $89,300. a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. If an amount is zero, enter zero "O". If required, round interim calculations to two decimal places. Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) January 21 Reject Accept Differential Order Order Effect (Alternative 1) (Alternative 2) on Income (Alternative 2) Revenues Costs: Direct materials Accounting numeric field Direct labor Variable factory overhead Variable selling and admin. expenses Shipping costs Certification costs Income (Loss) Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Eura Motors. b. What is the minimum price per unit that would be financially acceptable to Brightstone? Round your answer to two decimal places. per unit