Assignment:
Two machines:
| Category |
Old Machine |
New Machine |
Difference |
| |
|
|
|
| Acquisition Cost |
$300,000 |
$360,000 |
|
| Remaining Life |
4 years |
4 years |
|
| Salvage value now |
$100,000 |
- |
|
| Salvage value at the end of 4 years |
$4,000 |
$6,000 |
|
| Annual operating costs |
$140,000 |
80,000 |
|
| Defect Rate |
5% |
2.50% |
|
| Units Produced Annually |
100,000 |
100,000 |
|
Annual operating costs for the old machine are $140,000. The new machine will decrease annual operating costs by $60,000. These amounts do not include any charges for depreciation. The company used the straight-line depreciation method. These estimates of operation costs exlude rework costs. The new machine will also result in a decrease in the defect rate from the current 5% to 2.5%. All defective units are reworked at a cost of $1.00 per unit. The company, on average, produces 100,000 units annually.
Questions:
Should the company replace the old machine with the new one? I have to list all relevant costs
What costs should be considered sunk costs for this decision?
What other factors may affect the manager's decision?