Question

Differential Analysis for Machine Replacement Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $79,800, the accumulated depreciation is $31,900, 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 $166,000. 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 $253,000 Proposed Operations Sales $253,000 Direct materials $86,200 $86,200 Direct labor 59,900 Power and maintenance 5,600 2,000 Taxes, insurance, etc. 29,500 6,600 59,900 Selling and administrative expenses 59,900 Total expenses $213,600 $182,200 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". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Answer 1

Differential Analysis
	Continue with Old	Replace Old	Difference Effect on Income
Revenues:
Sales	1,265,000	1,265,000	-
Costs
Purchase Price	-	166,000	(166,000)
Direct material	431,000	431,000	-
Direct Labor	299,500	-	299,500
Power and Maintenance	28,000	147,500	(119,500)
Taxes, Insurance	10,000	33,000	(23,000)
Selling and Admin Expenses	299,500	299,500	-
Income	197,000	188,000	(9,000)
No, since income will reduce
Is Relevant