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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Differential analysis report for machine replacement

Lone 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 eight 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 $160,000. The automatic machine has an estimated useful life of eight years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on current and proposed operations:


a. 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.
b.Based only on the data presented, should the proposal be accepted?
CWhat are some of the other factors that should be considered In-fore a final decision is made?

To determine

(a)

Concept Introduction:

Differential Analysis Report: This report involves analyzing the different benefit and cost that would arise from an alternative solution to a particular problem. It is also known as incremental analysis.

To Prepare:

The differential analysis report for the proposal to replace the machine and the net annual differential change in the cost anticipated.

Explanation

In the given in question, life of the both macine is 8 years.

The original cost of the machine is $75,000 and accumulated depreciation is $30,000. At the end of the eight year, its residual value is zero.

And the cost of the new fully automatic machine is $160,000. At the end of the eight year, its residual value is also zero.

So, the differential analysis report in respect of cost is as under:

    ParticularAmount
    Total annual cost and expenses of old machine  $865,000
    Less: Total annual cost and expensesfor new machine  $822,000
    Total decrease in cost per annum   $43,000
To determine

(b)

Concept Introduction:

Differential Analysis Report: This report involves analyzing the different benefit and cost that would arise from an alternative solution to a particular problem. It is also known as incremental analysis.

To Find out:

Whether the proposal either be accepted or not

To determine

(c)

Concept Introduction:

Differential Analysis Report: This report involves analyzing the different benefit and cost that would arise from an alternative solution to a particular problem. It is also known as incremental analysis.

To find out:

The other factors that should be considered while accepting the offer.

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