Question

A machine with a book value of $126,000 has an estimated six-year life. A proposal is offered to sell the old machine for $84,000 and replace it with a new machine at a cost of $145,000. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $55,000 to $43,000.

	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

1)

Differential Analysis
Continue with Old Machine or Replace Old Machine
Feb-18
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income
Revenues:
Proceeds from sale of old machine		84000	84000
Costs:
Purchase price		-145000	-145000
Direct labor (8 years)	-440000	-344000	96000
Income (Loss)	-440000	-405000	35000

2)If its replaces the old machine, there will be savings of $ 35,000 So company should go by that alternative.