Question

Differential Analysis for Machine Replacement Proposal Flint Tooling Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows: Old Machine Cost of machine, 10-year life $108,300 Annual depreciation (straight-line) 10,830 Annual manufacturing costs, excluding depreciation 38,800 Annual nonmanufacturing operating expenses 11,500 Annual revenue 95,100 Current estimated selling price of the machine 34,900 New Machine Cost of machine, six-year life $138,000 Annual depreciation (straight-line) 23,000 Estimated annual manufacturing costs, exclusive of depreciation 18,700 Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine. Required: 1. Prepare a differential analysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. If an amount is zero, enter zero "0". Use a minus sign to indicate a loss. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) November 8 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 Annual manufacturing costs (6 yrs.) Income (Loss) $ $ $ 2. What other factors should be considered before a final decision is reached? Are there any improvements in the quality of work turned out by the new machine? What opportunities are available for the use of the funds required to purchase the new machine? Are there any improvements in the quality of work turned out by the new machine and what opportunities are available for the use of the funds required to purchase the new machine? What affect would this decision have on employee morale? None of these choices is correct.

Answer 1

Answer with explanation is given below

Differential Analysis 1 Existing Differential New Machine Machine Analysis $120,600 A $232,800 $112,200 Annual manufacturing cost ( 6 years) Cost of Machine Selling price of current machine Net cost of the machine $138,000 $34,900 $103,100 B $138,000 $34,900 $103,100 Total Affect on Income /(Loss) $17,500 A-B Note: Sales and non manufacturing cost being same under both alternatives have no affect on differential analysis Other factors to be considered 2. Are there any improvements in the quality of work turned out by the new machine? What opportunities are available for the use of the funds required to purchase the new machine?