Question

A machine with a book value of $248,200 has an estimated six-year life. A proposal is offered to sell the old machine for $214,800 and replace it with a new machine at a cost of $281,400. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,400 to $40,300.

Prepare a differential analysis dated October 3 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
October 3
	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
Direct labor (6 years)
Income (Loss)	$	$	$

Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Answer 1

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
October 3
	Continue with	Replace Old	Differential Effect
	Old Machine	Machine	on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues:
Proceeds from sale of old machine	0	214800	214800
Costs:
Purchase price	0	-281400	-281400
Direct labor (6 years)	-302400	-241800	60600
Income (Loss)	-302400	-308400	-6000
The company should continue with the old machine (Alternative 1)