Question

eBook Show Me How Calculator Differential Analysis for a Lease or Sell Decision Burlington Construction Company is considering selling excess machinery with a book value of $115,000 (original cost of $275,000 less accumulated depreciation of $160,000) for $90,000, less a 6% brokerage commission. Alternatively, the machinery can be leased for a total of $100,000, for four years, after which it is expected to have no residual value. During the period of the lease, Burlington Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $9,000. a. Prepare a differential analysis dated January 15 to determine whether Burlington Construction Company should lease (Alternative 1) or sell (Alternative 2) the machinery. If required, use a minus sign to indicate a loss. Differential Analysis Lease (Alt. 1) or Sell (Alt. 2) Machinery January 15 Lease Sell Differential Machinery Machinery Effect (Alternative 1) (Alternative 2) (Alternative 2) Revenues 100,000 $90,000 $10,000 Costs Profit (Loss) SU Feedback Check My Work Subtract the lease costs from the lease revenues. Subtract the sell machine costs from the sell machine revenue. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2. b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Lease the machinery < Previous Next > Check My Work

Answer 1

Differential analysis

	Lease machinery (alternative 1)	Sell the machinery (alternative 2)	Differential effect (alternative 2)
Revenues	100000	90000	-10000
Expenses	-9000	-5400	3600
Income (loss)	91000	84600	-6400

b) Lease the machinery