Differential Analysis Report for Machine ReplacementLone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $75,000, the accumulated depreciation is $30,000, its remaining useful life is five years,and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $141,600. The automatic machine has an estimated useful life of five years and no significant residualvalue. For use in evaluating the proposal, the accountant accumulated the following annual data on current and proposed operations:CurrentProposedOperationsOperationsSales$237,800$237,800Direct materials$81,000$81,000Direct labor56,30018,800Power and maintenance5,3009,000Taxes, insurance, etc.1,9006,200Selling and administrative expenses56,30056,300Total expenses$200,800$171,300a. Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs anticipated.LONE WOLF TECHNOLOGIESReplace MachineDifferential Analysis ReportAnnual costs and expenses-present machineAnnual costs and expenses-new machineAnnual differential decrease in costs and expenses vNumber of years applicableTotal differential decrease in costs and expenses vCost of new machineNet differential decrease in costs and expenses, five-year total vAnnual net differential decrease in costs and expenses-new machine

The cost function is a function that is used to show how production expense will change at different…

- Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs a LONE WOLF TECHNOLOGIES Denlase Mashine

- Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs a LONE WOLF TECHNOLOGIES Denlase Mashine

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 10E: Differential analysis for machine replacement Boyer Digital Components Company assembles circuit...

See similar textbooks

Similar questions

Cost Issues Deskin Company purchased a new machine to be used in its operations. The new machine was delivered by the supplier, installed by Deskin, and placed into operation. It was purchased under a long-term payment plan for which the interest charges approximated the prevailing market rates. The estimated useful life of the new machine is 10 years, and its estimated residual (salvage) value is significant. Normal maintenance was performed to keep the new machine in usable condition. Deskin also added a wing to the manufacturing building that it owns. The addition is an integral part of the building. Furthermore, Deskin made significant leasehold improvements to office space used as corporate headquarters. Required: 1. What costs should Deskin capitalize for the new machine? 2. Explain how Deskin should account for the normal maintenance performed on the new machine. 3. Explain how Deskin should account for the wing added to the manufacturing building. Where should the added wing be reported on Deskins financial statements? 4. Explain how Deskin should account for the leasehold improvements made to its office space. Where should the leasehold improvements be reported on Deskins financial statements?
Differential analysis for machine replacement proposal Lexigraphic Printing 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: Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine. Instructions 1. Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential profit that would result over the six-year period if the new machine is acquired. 2. List other factors that should be considered before a final decision is reached.
Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
Differential analysis report for machine replacement proposal Catalina Tooling Company is considering replacing a machine that has been used in its factory for two 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: Annual nonmanufacturing operating expenses and revenue are not expected to be affected by the purchase of the new machine. Instructions List other factors that should be considered before a final decision is reached.
St. Johns River Shipyards welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost 182,500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from 27,000 to 74,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 25%, and the project cost of capital is 12%. What is the NPV if the firm replaces the old welder with the new one?
A Cost of a Fixed Asset Mist City Car Wash purchased a new brushless car-washing machine for one of its bays. The machine cost $41,700. Mist City borrowed the purchase price from its bank on a 1-year, 8% note payable. Mist City paid $975 to have the machine transported to its place of business and an additional $200 in shipping insurance. Mist City incurred the following costs as a part of the installation: During the testing process, one of the motors became defective when soap and water entered the motor because its cover had not been installed properly by Mist Citys employees. The motor was replaced at a cost of $640. Required: 1. Compute the cost of the car-washing machine. 2. CONCEPTUAL CONNECTION Explain why any costs were excluded from the cost of the machine.
Montello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is expected to be driven for 125,000 miles. Montello uses the units-of-production depreciation method, and in year one the company expects the truck to be driven for 26,000 miles; in year two, 30,000 miles; and in year three, 40,000 miles. Consider how the purchase of the truck will impact Montellos depreciation expense each year and what the trucks book value will be each year after depreciation expense is recorded.
Jonfran Company manufactures three different models of paper shredders including the waste container, which serves as the base. While the shredder heads are different for all three models, the waste container is the same. The number of waste containers that Jonfran will need during the following years is estimated as follows: The equipment used to manufacture the waste container must be replaced because it is broken and cannot be repaired. The new equipment would have a purchase price of 945,000 with terms of 2/10, n/30; the companys policy is to take all purchase discounts. The freight on the equipment would be 11,000, and installation costs would total 22,900. The equipment would be purchased in December 20x4 and placed into service on January 1, 20x5. It would have a five-year economic life and would be treated as three-year property under MACRS. This equipment is expected to have a salvage value of 12,000 at the end of its economic life in 20x9. The new equipment would be more efficient than the old equipment, resulting in a 25 percent reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional one-time decrease in working capital requirements of 2,500, resulting from a reduction in direct material inventories. This working capital reduction would be recognized at the time of equipment acquisition. The old equipment is fully depreciated and is not included in the fixed overhead. The old equipment from the plant can be sold for a salvage amount of 1,500. Rather than replace the equipment, one of Jonfrans production managers has suggested that the waste containers be purchased. One supplier has quoted a price of 27 per container. This price is 8 less than Jonfrans current manufacturing cost, which is as follows: Jonfran uses a plantwide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor, included in fixed overhead at 45,000, would be eliminated. There would be no other changes in the other cash and noncash items included in fixed overhead except depreciation on the new equipment. Jonfran is subject to a 40 percent tax rate. Management assumes that all cash flows occur at the end of the year and uses a 12 percent after-tax discount rate. Required: 1. Prepare a schedule of cash flows for the make alternative. Calculate the NPV of the make alternative. 2. Prepare a schedule of cash flows for the buy alternative. Calculate the NPV of the buy alternative. 3. Which should Jonfran domake or buy the containers? What qualitative factors should be considered? (CMA adapted)
Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins’ cost of capital is 14%. Should the firm replace its old knitting machine? If so, which new machine should it use? By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?
Dunedin Drilling Company recently acquired a new machine at a cost of 350,000. The machine has an estimated useful life of four years or 100,000 hours, and a salvage value of 30,000. This machine will be used 30,000 hours during Year 1, 20,000 hours in Year 2, 40,000 hours in Year 3, and 10,000 hours in Year 4. Dunedin buys equipment frequently and wants to print a depreciation schedule for each assets life. Review the worksheet called DEPREC that follows these requirements. Since some assets acquired are depreciated by straight-line, others by units of production, and others by double-declining balance, DEPREC shows all three methods. You are to use this worksheet to prepare depreciation schedules for the new machine.