Differential Costs and Decision Making
Response to the following problem:
St. Mary Mills, Inc. (SMM) uses high-quality looms to manufacture its textile products. SMM has decided to replace one of its looms and has researched the following cost data on replacement looms. Using the following cost data, decide which alternative the company should pursue with respect to buying and operating a new piece of equipment. Use the differential-cost approach.
Seven Manufacturing Old Mill Supplies
Cost of new equipment $61,300 $55,000
Life time service and maintenance contract 1,200 4,800
Resale value of old equipment 500 500
Expected Cued operating costs 400 120
Original cost of old equipment 20,000 20,000