Question

Hadley Company is considering the disposal of equipment that is no longer needed for operations. The equipment originally cost $600,000 and accumulated depreciation to date totals $460,000. An offer has been received to lease the machine for its remaining useful life for a total of $290,000, after which the equipment will have no salvage value. The repair, insurance, and property tax expenses that would be incurred by Hadley on the machine during the period of the lease are estimated at $75,800. Alternatively, the equipment can be sold through a broker for $230,000 less a 10% commission. Required: Prepare a differential analysis report, dated June 15. Use a minus sign to indicate costs or a negative impact on income. Below the report, indicate whether the equipment should be leased or sold.

Answer 1

Answer

Preparation of a differential analysis report prosossal to lease equipment (alternative 1) or Sell equipment (alternative 2)

#		15 - June	-	-
1		Lease Equiment	Sell Equipment	Differential effect on income
		(Alternative 1 )	(Alternative 2)	(Alterantive 2)
2	Revenues	$290,000	$230,000	($60,000)
3	Less : Costs	$75,800	$23,000	($52,800)
4	Income (Loss)	$214,200	$207,000	($7,200)

Notes :

• Commission on sale = 10% of $230000 = $23000
• Ignoring any other disposal cost or any other fee

Comment : Hadley company should accept alternative 1 , because in this alternative getting more income than alternative 2.

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