Question

A machine with a book value of $124,560 has an estimated six-year life. A proposal is offered to sell the old machine for $83,030 and replace it with a new machine at a cost of $162,900. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $56,930 to $41,400. Required: 1. Prepare a differential analysis dated February 18 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required. 2. Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Answer 1

Solution 1:

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
18-Feb
Particulars	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine	$0.00	$83,030.00	$83,030.00
Costs:
Purchase price	$0.00	$162,900.00	$162,900.00
Direct labor (6 years)	$341,580.00	$248,400.00	-$93,180.00
Income (Loss)	-$341,580.00	-$328,270.00	$13,310.00

Solution 2:

Company should replace the old machine as it will result in operating income of $13,310