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)?
Labels Costs Revenues AmountDescriptions Direct labor (6years) Income (loss) Proceeds from saleof old machine Purchase price
1. Prepare a differential analysis dated February 18 on whetherto continue with the old machine (Alternative 1) or replace the oldmachine (Alternative 2). Refer to the lists of Labels and AmountDescriptions for the exact wording of the answer choices for textentries. For those boxes in which you must enter subtracted ornegative numbers use a minus sign. If there is no amount or anamount is zero, enter "0". A colon (:) will automatically appear ifrequired.
Differential Analysis
Continue with Old Machine (Alternative. 1) or Replace OldMachine (Alternative. 2)
February 18
1
Continue with Old Machine
Replace Old Machine
Differential Effect on Income
2
(Alternative 1)
(Alternative 2)
(Alternative 2)
3
4
5
6
7
8
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.
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. |
Related questions
Lexigraphic Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:
| Old Machine | |
|---|---|
| Cost of machine, 10-year life | $89,000 |
| Annual depreciation (straight-line) | 8,900 |
| Annual manufacturing costs, excluding depreciation | 23,600 |
| Annual non-manufacturing operating expenses | 6,100 |
| Annual revenue | 74,200 |
| Current estimated selling price of machine | 29,700 |
| New Machine | |
|---|---|
| Purchase price of machine, six-year life | $119,700 |
| Annual depreciation (straight-line) | 19,950 |
| Estimated annual manufacturing costs, excluding depreciation | 6,900 |
Annual non-manufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.
| Required: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1. | Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income The difference between the differential revenue and the differential costs. that would result over the six-year period if the new machine is acquired. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. | List other factors that should be considered before a final decision is reached. 1. Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income The difference between the differential revenue and the differential costs. that would result over the six-year period if the new machine is acquired. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required. Question not attempted.
Solution
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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) | $ | $ | $ |
