Question

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 $94,200, the accumulated depreciation is $37,700, 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 $195,900. 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	$298,600		$298,600
Direct materials	$101,700		$101,700
Direct labor	70,700		—
Power and maintenance	6,600		34,900
Taxes, insurance, etc.	2,400		7,800
Selling and administrative expenses	70,700		70,700
Total expenses	$252,100		$215,100

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". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

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)
Revenues:
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?

c. Differences in capacity between the two alternatives is   to consider before a final decision is made.

Answer 1

a.

Differential Analysis Continue with old machine (Alt.1) or Replace old machine (Alt.2) May 4
	Continue with old machine (Alt.1)	Replace old machine (Alt.2)	Differential effect on income (Alt.2)
Revenues:
Sales (5 years)	$1,493,000	$1,493,000	$0
Costs:
Purchase price		195,900	-195,900
Direct materials (5 years)	508,500	508,500	0
Direct labor (5 years)	353,500		353,500
Power and maintenance (5 years)	33,000	174,500	-141,500
Taxes, insurance, etc. (5 years)	12,000	39,000	-27,000
Selling and administrative expenses (5 years)	353,500	353,500	0
Income (Loss)	$232,500	$221,600	-$10,900

b.

As per the above results the proposal should not be accepted.

c.

Difference in capacity between the two alternatives is relevant / important to consider before a final decision is made.