Question

1.

Replace Equipment

A machine with a book value of $245,800 has an estimated six-year life. A proposal is offered to sell the old machine for $215,000 and replace it with a new machine at a cost of $282,800. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,900 to $40,700.

Prepare a differential analysis dated October 3 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). 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)
October 3
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	$	$	$
Costs:
Purchase price
Direct labor (6 years)
Income (Loss)	$	$	$

Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

2.

Process or Sell

Product A is produced for $3.36 per pound. Product A can be sold without additional processing for $4.23 per pound or processed further into Product B at an additional cost of $0.4 per pound. Product B can be sold for $4.5 per pound.

Prepare a differential analysis dated November 15 on whether to sell A (Alternative 1) or process further into B (Alternative 2). If required, round your answers to the nearest whole dollar. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Sell Product A (Alt. 1) or Process Further into Product B (Alt. 2)
November 15
	Sell Product A (Alternative 1)	Process Further into Product B (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per unit	$	$	$
Costs, per unit
Income (Loss), per unit	$	$	$

Should Product A be sold (Alternative 1) or processed further into Product B (Alternative 2)?

3.

Accept Business at Special Price

Product R is normally sold for $45 per unit. A special price of $31 is offered for the export market. The variable production cost is $22 per unit. An additional export tariff of 15% of revenue must be paid for all export products. Assume that there is sufficient capacity for the special order.

Prepare a differential analysis dated March 16, on whether to reject (Alternative 1) or accept (Alternative 2) the special order. If required, round your answers to two decimal places. 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
Reject Order (Alt. 1) or Accept Order (Alt. 2)
March 16
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per unit	$	$	$
Costs:
Variable manufacturing costs, per unit
Export tariff, per unit
Income (Loss), per unit	$	$	$

Should the special order be rejected (Alternative 1) or accepted (Alternative 2)?

Answer 1

(1)

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	$ 0	$        215,000	$            215,000
Costs:
Purchase price	$ 0	$ - 282,800	$ - 282,800
Direct labor (6 years)	$ - 305,400	$ - 244,200	$              61,200
Income (Loss)	$ - 305,400)	$ - 312,000	$ - 6,600

Company should continue with the old machine (Alternative 1)

(2)

	Sell Product A (Alternative 1)	Process Further into Product B (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per unit	$             4.23	$                 4.50	$                  0.27
Costs, per unit	$ - 3.36	$ - 3.76	$ - 0.40
Income (Loss), per unit	$             0.87	$                 0.74	$ - 0.13

Product A should be sold (Alternative 1)

(3)

	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per unit	$ 0	$            31.00	$                31.00
Costs:
Variable manufacturing costs, per unit	$                   0	$ - 22.00	$ - 22.00
Export tariff, per unit	$ 0	$ - 4.65	$ - 4.65
Income (Loss), per unit	$ 0	$              4.35	$                   4.35

Special order should be accepted (Alternative 2)