Replace Equipment A machine with a book value of $251,200 has anestimated six-year life. A proposal is offered to sell the oldmachine for $216,800 and replace it with a new machine at a cost of$282,500. The new machine has a six-year life with no residualvalue. The new machine would reduce annual direct labor costs from$50,500 to $40,400.
Prepare a differential analysis dated October 3
on whether to continue with the old machine (Alternative 1) orreplace the old machine (Alternative 2). If an amount is zero,enter zero "0". For those boxes in which you must enter subtractedor negative numbers use a minus sign. Differential AnalysisContinue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)October 3 Continue with Old Machine (Alternative 1) Replace OldMachine (Alternative 2) Differential Effect on Income (Alternative2) Revenues:
Proceeds from sale of old machine $ $ $ Costs:
Purchase price Direct labor (6 years)
Income (Loss) $ $ $
Should the company continue with the old machine (Alternative 1)or replace the old machine (Alternative 2)?
Replace Equipment A machine with a book value of $251,200 has anestimated six-year life. A proposal is offered to sell the oldmachine for $216,800 and replace it with a new machine at a cost of$282,500. The new machine has a six-year life with no residualvalue. The new machine would reduce annual direct labor costs from$50,500 to $40,400.
Prepare a differential analysis dated October 3
on whether to continue with the old machine (Alternative 1) orreplace the old machine (Alternative 2). If an amount is zero,enter zero "0". For those boxes in which you must enter subtractedor negative numbers use a minus sign. Differential AnalysisContinue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)October 3 Continue with Old Machine (Alternative 1) Replace OldMachine (Alternative 2) Differential Effect on Income (Alternative2) Revenues:
Proceeds from sale of old machine $ $ $ Costs:
Purchase price Direct labor (6 years)
Income (Loss) $ $ $
Should the company continue with the old machine (Alternative 1)or replace the old machine (Alternative 2)?
Related questions
A machine with a book value of $126,000 has an estimatedsix-year life. A proposal is offered to sell the old machine for$84,000 and replace it with a new machine at a cost of $145,000.The new machine has a six-year life with no residual value. The newmachine would reduce annual direct labor costs from $55,000 to$43,000.
| Required: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1. | Prepare a differential analysisdated February 18 on whether to continue with the old machine(Alternative 1) or replace the old machine (Alternative 2). Referto the lists of Labels and Amount Descriptions for the exactwording of the answer choices for text entries. For those boxes inwhich you must enter subtracted or negative numbers use a minussign. If there is no amount or an amount is zero, enter "0". Acolon (:) will automatically appear if required. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. | Should the company continue with the old machine(Alternative 1) or replace the old machine (Alternative2)?
2. Should the company continue with the old machine (Alternative1) or replace the old machine (Alternative 2)? The company is indifferent since the result is the sameregardless of which alternative is chosen. Replace the old machine. Continue with the old machine. |
Differential Analysis for Machine Replacement Proposal
Flint Tooling Company is considering replacing a machine thathas been used in its factory for two years. Relevant dataassociated with the operations of the old machine and the newmachine, neither of which has any estimated residual value, are asfollows:
| Old Machine | |
| Cost of machine, eight-year life | $38,000 |
| Annual depreciation (straight-line) | 4,750 |
| Annual manufacturing costs, excluding depreciation | 12,400 |
| Annual nonmanufacturing operating expenses | 2,700 |
| Annual revenue | 32,400 |
| Current estimated selling price of the machine | 12,900 |
| New Machine | |
| Cost of machine, six-year life | $57,000 |
| Annual depreciation (straight-line) | 9,500 |
| Estimated annual manufacturing costs, exclusive ofdepreciation | 3,400 |
Annual nonmanufacturing operating expenses and revenue are notexpected to be affected by purchase of the new machine.
Required:
1. Prepare a differential analysis as ofNovember 8 comparing operations using the present machine(Alternative 1) with operations using the new machine (Alternative2). The analysis should indicate the differential income that wouldresult over the six-year period if the new machine is acquired. Ifan amount is zero, enter zero "0". Use a minus sign to indicate aloss.
| DifferentialAnalysis | |||
| Continue withOld Machine (Alt. 1) or Replace Old Machine (Alt. 2) | |||
| November8 | |||
| Continue with Old Machine (Alternative1) | Replace Old Machine (Alternative 2) | Differential Effect on Income (Alternative2) | |
| Revenues: | |||
| Proceeds from sale of old machine | $ | $ | $ |
| Costs: | |||
| Purchase price | |||
| Annual manufacturing costs (6 yrs.) | |||
| Income (Loss) | $ | $ | $ |
Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $57,300, the accumulated depreciation is $22,900, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $119,200. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:
| Present Operations | Proposed Operations | |||
| Sales | $181,600 | $181,600 | ||
| Direct materials | $61,900 | $61,900 | ||
| Direct labor | 43,000 | รขยย | ||
| Power and maintenance | 4,000 | 21,200 | ||
| Taxes, insurance, etc. | 1,400 | 4,800 | ||
| Selling and administrative expenses | 43,000 | 43,000 | ||
| Total expenses | $153,300 | $130,900 |
a. Prepare a differential analysis dated May 4, to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0".
| Differential Analysis | |||
| Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) | |||
| May 4 | |||
| Continue with Old Machine (Alternative 1) | Replace Old Machine (Alternative 2) | Differential Effect on Income (Alternative 2) | |
| Sales (5 years) | $ | $ | $ |
| Costs: | |||
| Purchase price | |||
| Direct materials (5 years) | |||
| Direct labor (5 years) | |||
| Power and maintenance (5 years) | |||
| Taxes, insurance, etc. (5 years) | |||
| Selling and admin. expenses (5 years) | |||
| Income (Loss) | $ | $ | $ |
b. Based only on the data presented, should the proposal be accepted? ( Should or shouldnt be accepted)
c. Differences in capacity between the two alternatives is _____ to consider before a final decision is made. ( Relevant or irrelevant )
