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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.

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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307

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Chapter
Section
BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307
Chapter 24, Problem 24.1APE
Textbook Problem
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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.

To determine

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
  Lease Machine (Alternative 1) Sell Machine (Alternative 2) Differential effect
Revenues $272,000 $262,000 ($10,000)
Costs ($21,600) (1)   ($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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Chapter 24 Solutions

Financial & Managerial Accounting
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