2. Differential Analysis for Machine Replacement
Boyer Digital Components Company assembles circuit boards by
using a manually operated machine to insert electronic components.
The original cost of the machine is $90,600, the accumulated
depreciation is $36,200, 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 fully automatic machine that has a purchase price of
$188,400. 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 | $287,200 | $287,200 | ||
Direct materials | $97,800 | $97,800 | ||
Direct labor | 68,000 | — | ||
Power and maintenance | 6,300 | 33,500 | ||
Taxes, insurance, etc. | 2,300 | 7,500 | ||
Selling and administrative expenses | 68,000 | 68,000 | ||
Total expenses | $242,400 | $206,800 |
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". If required, use a minus sign to indicate a loss.
Solution:
Differential Analysis | |||
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) | |||
Continue with Old Machine (Alt. 1) | Replace Old Machine (Alt. 2) | Differential effect on Income (Alt.2) | |
Revenues: | |||
Sales | $2,87,200.00 | $2,87,200.00 | $0.00 |
Costs: | |||
Purchase price | $0.00 | -$1,88,400.00 | -$1,88,400.00 |
Total expenses (5 years) | -$12,12,000.00 | -$10,34,000.00 | $1,78,000.00 |
Income (Loss) | -$9,24,800.00 | -$9,35,200.00 | -$10,400.00 |
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