Question

Differential Analysis for a Lease-or-Sell Decision

Sure-Bilt Construction Company is considering selling excess machinery with a book value of $278,200 (original cost of $399,000 less accumulated depreciation of $120,800) for $277,100, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $286,900 for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $26,300.

a. Prepare a differential analysis, dated May 25 to determine whether Sure-Bilt should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
May 25
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$	$

b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.

The net   from selling is $.

Answer 1

	Lease Machinery (Alt 1)	Sell Machinery (Alt 2)	Differential Effect on Income (Alt 2)
Revenues	$286,900	$277,100	$(9,800)
Costs	(26,300)	(13,855)	12,445
Income (Loss)	$260,600	$263,245	$2,645

Note:

Cost of Brokerage on Selling Machinery = Cost of Machinery x Commission Rate

= $277,100 x 5% = $13,855

Cost of Repairs, Insurance and Property Tax = $26,300

The Net Inflow from the Sale of Machinery (Alt 2) is higher than Leasing the Machinery (Alt 1). Therefore, it is advisable to sell the machinery.