Question

Replace Equipment A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500 and replace it with a new machine at a cost of $75,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $11,200 to $7,400. a. Prepare a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter "O". Use a minus sign to indicate subtracted or negative numbers or a loss. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) April 11 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues Proceeds from sale of old machines Costs: Purchase price Direct labor (5 years) Income (Loss) b. Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)

Answer 1

1a) Differential analysis

	Continue with old machine	Replace with old machine	Differential effect on income
Revenues
Proceeds from sale of machine		50500	50500
Costs
Purchase price		-75000	-75000
Direct labor	11200*5 = -56000	7400*5 = -37000	19000
Income (loss)	-56000	-61500	-5500

1b) Company should continue with old machine

Note: Please post each question individually as HOMEWORKLIB guidelines