Question

Differential Analysis for a Lease or Sell Decision Granite Construction Company is considering selling excess machinery with a book value of $281,400 (original cost of $401,400 less accumulated depreciation of $120,000) for $277,100, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $285,200 for five years, after which it is expected to have no residual value. During the period of the lease, Granite Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $24,800. a. Prepare a differential analysis, dated November 7 to determine whether Granite should lease (Alternative 1) or sell (Alternative 2) the machinery. Differential Analysis Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) November 7 Lease Machinery (Alternative 1) Sell Machinery (Alternative 2) Differential Effect on Income (Alternative 2) Revenues Costs Income (Loss) $ b. On the basis of the data presented, would it be advisable to lease or sell the machinery?

Answer 1

1
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	285200	277100	-8100
Costs	-24800	-13855	10945
Income(loss)	260400	263245	2845
b
Sell the machinery
2
Direct materials per unit	10.27	=370500/36080
Direct labor per unit	3.77	=136200/36080
Variable factory overhead per unit	1.06	=38108/36080
Minimum unit cost	15.10	per unit