Steve

Steve Anderson

Anderson, the production manager at Franklin

Franklin Company, purchased a cutting machine for the company last year. Six months after the purchase of the cuttingmachine, Steve

Steve learned about a new cutting machine that is more reliable than the machine that he purchased. The following information is available for the twomachine

Requirements

(a)

Should Steve

Steve Anderson

Anderson replace the old machine with the newmachine? Explain, listing all relevant costs.

(b)

What costs should be considered as sunk costs for thisdecision?

(c)

What other factors may affect Anderson's

Anderson's decision?

CATEGORY

OLD MACHINE

NEW MACHINE

Acquisition cost

$

320,000

$

350,000

Remaining life

4 years

4 years

Salvage value now

$

100,000

---

Salvage value at the end of 4 years

$

2,500

$

4,000

Annual operating costs for the old machine are $ 150 comma 000

$150,000. The new machine will decrease annual operating costs by $ 55 comma 000

$55,000. These amounts do not include any charges for depreciation. Franklin

Franklin Company uses thestraight-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 %

5% to 2.5 %

2.5%. All defective units are reworked at a cost of $ 2

$2 per unit. Thecompany, onaverage, produces 100 comma 000

100,000 units annually.