Question

Differential Analysis for Machine Replacement 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 $71,900, the accumulated depreciation is $28,800, 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 $149,600. 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 Proposed Operations Operations Sales $227,900 $227,900 Direct materials $77,700 $77,700 Direct labor 53,900 Power and maintenance 5,000 26,600 Taxes, insurance, etc. 1,800 6,000 Selling and administrative expenses 53,900 53,900 Total expenses $192,300 $164,200 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. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Answer 1

Differential analysis

	Continue with old machine	Replace old machine	Differential effect on income
Revenues:
Sales	227,900 x 5 = 1,139,500	227,900 x 5 = 1,139,500	0
Costs:
Purchase price	0	149,600	- 149,600
Direct material	77,700 x 5 = 388,500	77,700 x 5 = 388,500	0
Direct labor	53,900 x 5 = 269,500	0	269,500
Power and maintenance	5,000 x 5 = 25,000	26,600 x 5 = 133,000	- 108,000
Taxes, insurance	1,800 x 5 = 9,000	6,000 x 5 = 30,000	- 21,000
Selling and administrative expenses	53,900 x 5 = 269,500	53,900 x 5 = 269,500	0
Income (loss)	$178,000	$168,900	- $9,100

Considering the above, continuing with the old machine is better.

Kindly comment if you need further assistance. Thanks