Question

Taipei Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $58,600, the accumulated depreciation is $23,400, its remaining useful life is five years, and its residual value is negligible. On September 27, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $121,900. 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 $185,800 $185,800 Direct materials 63,300 63,300 Direct labor 44,000 — Power and maintenance 4,100 21,700 Taxes, insurance, etc. 1,500 4,900 Selling and administrative expenses 44,000 44,000 Total expenses $156,900 $133,900 a. Prepare a differential analysis dated September 27, 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 zero "0". Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) September 27 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?

Answer 1

Solution a:

Differential Analysis - Continue with old machine (alt 1) or Replace old machine (Alt2)
Particulars	Continue with old machine (Alt 1)	Replace old machine (Alt 2)	Differential effect on income (Alt 2)
Revenues:
Sales	$929,000.00	$929,000.00	$0.00
Costs:
Purchase price	$0.00	-$121,900.00	-$121,900.00
Direct Materials	-$316,500.00	-$316,500.00	$0.00
Direct Labor	-$220,000.00	$0.00	$220,000.00
Power and maintenance	-$20,500.00	-$108,500.00	-$88,000.00
Taxes, Insurance Etc.	-$7,500.00	-$24,500.00	-$17,000.00
Selling and administrative expenses	-$220,000.00	-$220,000.00	$0.00
Income (Loss)	$144,500.00	$137,600.00	-$6,900.00

Solution b:

As there is net financial disadvantage of $6,900 in replacment of machine, therefore machine should not be replaced.