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Lease or sell Claxon Company owns a machine with a cost of $305,000 and accumulated depreciation of $65,000 that can he sold for $262,000, less a 5% sales commission. Alternatively, the machine can be leased by Claxon Company for three years for a total of $272,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Claxon Company on the machine would total $21,600 over the three years. Prepare a differential analysis on January 12 as to whether Claxon Company should lease (Alternative 1) or sell (Alternative 2) the machine.
Financial & Managerial Accounting
Solutions
Financial & Managerial Accounting
Lease or sell
Claxon Company owns a machine with a cost of $305,000 and accumulated depreciation of $65,000 that can he sold for $262,000, less a 5% sales commission. Alternatively, the machine can be leased by Claxon Company for three years for a total of $272,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Claxon Company on the machine would total $21,600 over the three years. Prepare a differential analysis on January 12 as to whether Claxon Company should lease (Alternative 1) or sell (Alternative 2) the machine.
Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.
Whether Company C should sell or lease the machine.
Explanation of Solution
The differential analysis of income from both alternatives is shown below.
| Differential analysis for Company C | |||
| Lease Machine (Alt. 1) or Sell Machine (Alt. 2) | |||
| January 12 | |||
| Â | Lease Machine (Alternative 1) | Sell Machine (Alternative 2) | Differential effect |
| Revenues | $272,000 | $262,000 | ($10,000) |
| Costs | ($21,600) | (1)Â Â ($13,100) | $8,500 |
| Income (loss) | $250,400 | $248,900 | (-$1,500) |
Table (1)
Company C should lease the machine, as it has a greater differential income...
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