4.

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $597,200 and has $352,300 of accumulated depreciation to date, with a new machine that has a purchase price of $483,400. The old machine could be sold for $64,100. The annual variable production costs associated with the old machine are estimated to be $157,000 per year for 8 years. The annual variable production costs for the new machine are estimated to be $102,000 per year for 8 years.

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a.1 Prepare a differential analysis dated December 10 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 (Alt. 1) or Replace (Alt. 2) Old Machine December 10

Line Item Description	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine	$Proceeds from sale of old machine	$Proceeds from sale of old machine	$Proceeds from sale of old machine
Costs:
Purchase price	Purchase price	Purchase price	Purchase price
Variable productions costs (8 years)	Variable productions costs (8 years)	Variable productions costs (8 years)	Variable productions costs (8 years)
Profit (loss)	$Profit (loss)	$Profit (loss)	$Profit (loss)

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a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Continue or Replace old machine? ____________

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b. What is the sunk cost in this situation? ____________