Question

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 $78,100, the accumulated depreciation is $31,200, 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 $162,400. 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	$247,600		$247,600
Direct materials	$84,300		$84,300
Direct labor	58,600		—
Power and maintenance	5,500		28,900
Taxes, insurance, etc.	2,000		6,500
Selling and administrative expenses	58,600		58,600
Total expenses	$209,000		$178,300

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".

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)
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)	$	$	$

Answer 1

1

Diffrantial Analusis
Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2)
4-May
	Continue with Old	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
	Machine (Alternative 1)
Revenues:
Sales (5 years)	1238000	1238000	0
Less: Cost
Purchase price	0	162400	-162400
Direct materials (5 years)	421500	421500	0
Direct labor (5 years)	293000	0	293000
Power and maintenance (5 years)	27500	144500	-117000
Taxes, insurance, etc. (5 years)	10000	32500	-22500
Selling and admin. expenses (5 years)	293000	293000	0
Income (Loss)	193000	184100	-8900

2

Proposal Should not be accepted because differential income is negative $ (8,900 ) so it should not be accepted

Working notes for the above answer is as under