Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: $\begin{array}{lll}&\text {Old Machine }&\text {New Machine }\
\text { Price } & \$ 300,000 & \$ 600,000 \
\text { Accumulated Depreciation } & 90,000 & -0- \
\text { Remaining useful life } & 10 \text { years } & -0 \text { - } \
\text { Useful life } & -0 \text { - } & 10 \text { years } \
\text { Annual operating costs } & \$ 240,000 & \$ 180,600
\end{array}$ If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is relevant to the replacement decision?
A) $210,000
B) $300,000
C) $59,400
D) $90,000

Question

Quizplus · Accepted Answer

The relevant costs for the replacement decision include the differential costs between the old and new machine. The annual operating cost savings of replacing the old machine ($240,000 - $180,600 = $59,400) is relevant. The price of the old and new machines, their accumulated depreciation, and the sale price of the old machine are sunk or not incremental costs for this decision.

Sala Co Is Contemplating the Replacement of an Old Machine with with a New