Question

Differential Analysis for a Lease-or-Sell Decision

Sure-Bilt Construction Company is considering selling excess machinery with a book value of $282,800 (original cost of $400,800 less accumulated depreciation of $118,000) for $277,400, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $286,000 for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $26,100.

a. Prepare a differential analysis, dated May 25 to determine whether Sure-Bilt should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
May 25
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues
Costs
Income (Loss)

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Subtract the lease costs from the lease revenues. Subtract the sell machinery costs from the sell machinery revenues. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.

b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.
Sell the machinery

The net gain from selling is $ .

Answer 1

(a)
Differential Analysis Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) May 25
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$ 286,000	$ 277,400	($ 8,600)
Costs	($ 26,100)	($ 13,870) ( $ 277,400 x 5% )	$ 12,230
Income (Loss)	$ 259,900	$ 263,530	$ 3,630
(b)
Sell the machinery
The net gain from selling is $ 3,630