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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

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.

To determine

Concept Introduction:

Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.

Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.

Two basic types of the relevant costs are as follows:

  1. Out-of-pocket costs
  2. Opportunity costs

To Indicate:

If the proposal should be accepted or not

Explanation

The differential analysis report of the proposal is prepared as follows:

    Year Cash Flow PVFPV
    A B =A*B
    Cost of equipment 0 $ (900,000) 1.00000 $ (900,000.00)
    Residual Value of Equipment 15 $ 100,000 0...

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