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 $60,740, the accumulated depreciation is $25,880, 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 $174,135. 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:

1		Present Operations	Proposed Operations
2	Sales	$205,390.00	$205,390.00
3	Direct materials	$72,640.00	$72,640.00
4	Direct labor	50,245.00	0.00
5	Power and maintenance	4,775.00	16,375.00
6	Taxes, insurance, etc.	1,590.00	5,975.00
7	Selling and administrative expenses	45,820.00	45,820.00
8	Total expenses	$175,070.00	$140,810.00

	Required:
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. 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.
b.	Based only on the data presented, should the proposal be accepted?
c.	What are some of the other factors that should be considered before a final decision is made?

Labels
Cash flows from investing activities
Costs
Revenues
Amount Descriptions
Direct labor (5 years)
Direct materials (5 years)
Gain on sale of investments
Income (loss)
Loss on sale of investments
Power and maintenance (5 years)
Purchase price
Sales (5 years)
Selling and administrative expenses (5 years)
Taxes, insurance, etc. (5 years)
Total costs

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. 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.

Differential Analysis

Continue with (Alternative 1) or Replace (Alternative 2) Old Machine

May 4

1		Continue with Old Machine	Replace Old Machine	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6
7
8
9
10
11
12

b. Based only on the data presented, should the proposal be accepted?

-Should be accepted

-Should not be accepted

c. What are some of the other factors that should be considered before a final decision is made? Check all that apply.

-Differences in product quality between the two alternatives

-Book value of the original machine

-Cost of supplies and inventory purchased in the past

-Opportunity costs associated with alternative uses of the $174,135 purchase price

-Differences in capacity between the two alternatives

Answer 1