Steve Heller, the production manager at Frothingham Company, purchased a cutting machine for the company last year. Six months after the purchase of the cutting machine, Steve learned about a new cutting machine that is more reliable than the machine that he purchased. The following information is available for the two machines: E (Click the icon to view the data.)

CATEGORY OLD MACHINE NEW MACHINE

Acquisition cost 315,000 360,000

Remaining life 4 years 4 years

Salvage value now 95,000

Salvage value

at the end of 4 years 3,500 5,000

Annual operating costs for the old machine are $180,000. The new machine will decrease annual operating costs by $55,000. These amounts do not include any charges for depreciation. Frothingham Company uses the straight-line depreciation 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 1%. All defective units are reworked at a cost of $1 per unit. The company, on average, produces 100,000 units annually.

Requirements

(a)	Should Steve Heller 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 Heller's decision?