Question

1. Replace Equipment

   A machine with a book value of $251,700 has an estimated six-year life. A proposal is offered to sell the old machine for $216,200 and replace it with a new machine at a cost of $280,700. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,700 to $40,600.

   Prepare a differential analysis dated October 3 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). 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)
   October 3
   	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
   Revenues:
   Proceeds from sale of old machine	$	$	$
   Costs:
   Purchase price
   Direct labor (6 years)
   Income (Loss)	$	$	$

   Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?
   

Answer 1

Differential Analysis
Reject order (Alt.1)or Accept order (Alt.2)
October- 3
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential effects ( Alternative 2)
Revenues:
Proceeds from sale of old machine	0	216,200	216,200
Costs:
Purchase price	0	-280,700	-280,700
Direct labor (6 years)	-304,200	-243,600	60,600
Income (Loss)	$(304,200.00)	$ (308,100.00)	$ (3,900.00)

Net incremental advantage of continuing with old machine $3,900

The old machine should not be replaced

Kindly comment if you need further assistance.

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