Question

Differential Analysis Report for Machine Replacement Proposal

Flint Tooling Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Old Machine
Cost of machine, 10-year life	$108,700
Annual depreciation (straight-line)	10,870
Annual manufacturing costs, excluding depreciation	39,300
Annual nonmanufacturing operating expenses	12,300
Annual revenue	94,000
Current estimated selling price of the machine	36,100
New Machine
Cost of machine, six-year life	$136,800
Annual depreciation (straight-line)	22,800
Estimated annual manufacturing costs, exclusive of depreciation	17,500
Annual nonmanufacturing operation expenses	10,000

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Required:

1. Prepare a differential analysis report comparing operations utilizing the new machine with operations using the old machine. The analysis should indicate the differential income that would result over the six-year period if the new machine is acquired. Enter all amounts as positive numbers.

Flint Tooling Company
Proposal to Replace Machine
	$
	$
Number of years applicable	x
	$
	$
	$

2. What are some of the other factors that should be considered before a final decision is made?

1. Are there any improvements in the quality of work turned out by the new machine?
2. What other opportunities are available for the use of the funds that are required to purchase the new machine?
3. What effect does the federal income tax have on the decision?
4. What is the book value of the machine that will be replaced?

Select the relevant factor(s) from the list above.

Answer 1

Differential Analysis Statement
	Continue with Old	Replace Machine	Differential Effect
Proceeds From Sale Of Old Machine		$36,100.00	$36,100.00
Benefit due to reduction in Annual Manufacturing Costs, Excluding Depreciation	$235,800.00	$105,000.00	$130,800.00
	(39300*6)	(17500*6)
Less; Prchase Price of New Machine		-$136,800.00	-$136,800.00
Net Differential Effect on net Income by replacing machine			$30,100.00

Part-2

1. Are there any improvements in the quality of work turned out by the new machine?
2. What other opportunities are available for the use of the funds that are required to purchase the new machine?
3. What effect does the federal income tax have on the decision?