Question

Differential Analysis for Machine Replacement 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 $55,600, the accumulated depreciation is $22,200, 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 full automatic machine that has a purchase price of $115,600. 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 Proposed Operations Operations Sales $176,300 $176,300 Direct materials $60,000 $60,000 41,700 Direct labor Power and maintenance 3,900 20,600 Taxes, insurance, etc. 1,400 4,600 Selling and administrative expenses 41,700 41,700 Total expenses $148,700 $126,900 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".

Answer 1

Differential analysis
			continue with old machine (alternative 1)	replace old machine (alternative 2)	Differential effect on income (alternative 2)
sales (5 years)			881500	881500	0
costs:
purchase price			0	-115600	-115600
direct material (5 yr)			-300000	-300000	0
direct labor (5 yr)			-208500		208500
power & maintenance (5yr)			-19500	-103000	-83500
taxes, insurance,etc (5 yr)			-7000	-23000	-16000
selling & admin expenses (5yr)			-208500	-208500	0
income (loss)			138000	131400	-6600
b) based only on the data presented proposal should not accepted
c) Difference in capacity between the two alternatives is relevant to consider
before a final decision is made

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