Replace EquipmentA machine with a book value of $251,000 has an estimated six-year life. A proposal is offered to sell the old machine for $216,200 and replace it with a newmachine at a cost of $283,00o. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from$50,000 to $40,000.Prepare a differential analysis dated October 3 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If anamount is zero, enter "O". For those boxes in which you must enter subtracted or negative numbers use a minus sign.Differential AnalysisContinue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)October 3Differential Effecton Income(Alternative 2)Continue withOld Machine(Alternative 1) (Alternative 2)Replace OldMachineRevenues:Proceeds from sale of old machineCosts:Purchase priceDirect labor (6 years)$Continue with the old machineReplace the old machinewith the old machine (Alternative 1) or replace the old machine (Alternative 2)?

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Asked Nov 3, 2019
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Replace Equipment
A machine with a book value of $251,000 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 $283,00o. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from
$50,000 to $40,000.
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 "O". 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
Differential Effect
on Income
(Alternative 2)
Continue with
Old Machine
(Alternative 1) (Alternative 2)
Replace Old
Machine
Revenues:
Proceeds from sale of old machine
Costs:
Purchase price
Direct labor (6 years)
$
Continue with the old machine
Replace the old machine
with the old machine (Alternative 1) or replace the old machine (Alternative 2)?
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Replace Equipment A machine with a book value of $251,000 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 $283,00o. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,000 to $40,000. 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 "O". 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 Differential Effect on Income (Alternative 2) Continue with Old Machine (Alternative 1) (Alternative 2) Replace Old Machine Revenues: Proceeds from sale of old machine Costs: Purchase price Direct labor (6 years) $ Continue with the old machine Replace the old machine with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

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Step 1

Replace Equipment:

The productive life of an asset may be exhausted before its estimated lifetime. Therefore, there is a question arises up upon the management of a concern that whether to discard that asset from their manufacturing department or to replace it with a new one in order to get more revenue. So, the management has to analyze new option whether to continue with the old machine or to replace it with the new one in order to bring more weightiness in productivity.

Step 2

Given,

A machine having estimated life of six years has two proposal under consideration:

Alternative 1- Continue with the old machine, with annual direct labor cost of $50,000 for further six years.

Alternative 2- Replace it with a new machine at a cost of $283,000 having estimated life of six years. Old machine will be sold for $216,200 annual direct labor cost will be reduced to $40,000 for six years.

Step 3

Following is the preparation of the statement of differential analysis as on October, 3 to se...

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Differential Analysis for Machine Alternative 1 continue with the old machine and Alternative 2 replace the old machine with new one As on October 3 Differential Continue with Old Replacing the Old Machine Particulars Мachine with new one effect on (B) (A) Total Income (В-А) Alternative 2 Alternative Revenue Proceeds from Sale of old machine Costs Cost of Purchase Direct labor $0 $216,200 $216,200 $283,000 (S40,000 x6) $240,000 (S0 $300,000) ($283,000+$2,40,000) -$523,000 $0 $283,000 ($50,000 x 6) -$60,000 - $300,000 Total Cost (Cost of purchase direct labor) Net Income (Revenue Total cost) $223,000 -$300,000 (S0-$300,000) (S216,200-$523,000) = -$300,000 $6,800 =-$306,800 Therefore, There is a loss of $6,800 if old machine is replace with new machine

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