Question

Differential Analysis for Machine Replacement Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $85,600, the accumulated depreciation is $34,200, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $178,000. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: Present Operations Proposed Operations Sales $271,400 $271,400 Direct materials $92,400 $92,400 Direct labor 64,200 — Power and maintenance 6,000 31,700 Taxes, insurance, etc. 2,100 7,100 Selling and administrative expenses 64,200 64,200 Total expenses $228,900 $195,400 a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. 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) May 4 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Sales (5 years) $ $ $ Costs: Purchase price Direct materials (5 years) Direct labor (5 years) Power and maintenance (5 years) Taxes, insurance, etc. (5 years) Selling and admin. expenses (5 years) Income (Loss) $ $ $ b. Based only on the data presented, should the proposal be accepted? c. Differences in capacity between the two alternatives is to consider before a final decision is made.

Answer 1