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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Machine replacement decision

A company is considering replacing an old piece of machinery, which cost $105,000 and has $55,000 of accumulated depreciation to dale, with a new machine that has a purchase price of $83,000. The old machine could be sold for $56,300. The annual variable production costs associated with the old machine are estimated to be $8,500 per year for eight years. The annual variable production costs for the new machine are estimated to be $5,000 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.

b. What is the sunk cost in this situation?

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business

To Prepare: The differential analysis dated April 29, for given alternatives.

Explanation

The differential analysis as on April 29, for given alternatives is shown below.

Differential Analysis
Continue (Alt. 1) or Replace (Alt. 2), Old Machine
April 29
Continue with
Old Machine  (Alternative 1)
Replace the
Old Machine  (Alternative 2)
Differential Effect on income
Revenues
    Proceeds from Old Machine $0 $56,300 $56,300
Costs:
   Purchase Price $0 (-)  $83,000 (-)  $83,000
   Variable Production Cost (8years) (1) (-)  $68,000 (2) (-)  $40,000 $28,000
Income (loss) (-)  $68,000 ...

b)

To determine

To Explain: The sunk cost of the company in the given situation.

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