Question

please help and expain i have a final thank you.

Differential Analysis Practice Quiz replacing a machine that has been used for four years. e neither the new or old machine has a residual value Yearly revenue and nonmanufacturing expenses are not e Yearly Old Machine Cost, 10 year life Annual Depreciation 108,000 10,800 Annual Manufacturing Costs (exci. Dep.) N Annual nonmanufacturing expenses Annual revenue 38,600 12,300 95,000 Selling price of machine 35,900 Cost, 6 year life Annual Depreciation Annual Manufacturing Costs texcl. Dep) 138,000 23,000 18,200 1. Prepare a crential anaysis comparing present machine (Alt. 1) to new anaysis machine (Alt. 2). Analysis should indicate total differential income over the six-year period if the new machine is purchased. Differential New Machine Old Machine (Alt. 2) Income Revenues 5,00 0 Costs Income (Loss) Which Alternative would you propose? What other factors should be considered? What if you could invest the funds required to purchase the new equipment (cost less oceeds from sale of old machine) at 5% per year. In other words, what is the opportunity st associated with the decision? Does this change your position?

Answer 1

Solution 1): Preparation of Differential Analysis

	Old Machine	New Machine	Differential Income
	Alt.1	Alt.2
Revenues	95,000.00	95,000.00	-
Costs:
Annual Depreciation	10,800.00	23,000.00	-12,200.00
Annual Manufacturing Cost	38,600.00	18,200.00	20,400.00
Annual Non-Manufacturing Expenses	12,300.00	12,300.00	-
Total Cost	61,700.00	53,500.00	8,200.00
Income (Loss)	33,300.00	41,500.00	8,200.00

Solution 2) As the Net Income of the company is increasing by $8,200, company go with Alternative 2 that is purchasing new machine.

:Following are some of the factors company should consider while making a decision:

Staff Motivation: The staff should be motivated to switch over to the new machine and technology

Customer’s satisfaction. The satisfaction that the customers has to be considered

Availability of manpower. The company needs to make sure that there is enough manpower to operate the new machine

Solution 3) Cost of the New Machine = $138,000
Less: Selling Price of Old Machine    = $35,900

Amount available for Investment       = $102,100

Return generated on the investment = 5/100 x 102,100 = $5,105 per year

As the return generated on the investment is less than the Income generated by new machine, the company should go with alternative 2 that is purchasing new machine.