Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $601,000 and has $350,100 of accumulated depreciation to date, with a new machine that has a purchase price of $485,200. The old machine could be sold for $61,300. The annual variable production costs associated with the old machine are estimated to be $156,200 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,200 per year for eight years.

a. Prepare a differential analysis dated May 29 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 Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine
Costs:
Purchase price
Variable productions costs (8 years)
Profit (Loss)

b. What is the sunk cost in this situation?

Calgary Lumber Company incurs a cost of $384 per hundred board feet (hbf) in processing certain rough-cut lumber, which it sells for $570 per hbf. An alternative is to produce a finished-cut at a total processing cost of $528 per hbf, which can be sold for $748 per hbf.

c. Prepare a differential analysis dated March 15 on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Differential Analysis
Sell Rough-Cut (Alt. 1) or Process Further into Finished-Cut (Alt. 2)
March 15
	Sell Rough-Cut (Alternative 1)	Process Further into Finished-Cut (Alternative 2)	Differential Effects (Alternative 2)
Revenues, per 100 board ft.
Costs, per 100 board ft.
Profit (Loss), per 100 board ft.