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Differential analysis for machine replacement Boyer Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000, the accumulated depreciation is $24,000, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $180,000. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: a. Prepare a differential analysis dated May 4 to determine whether to continue with ( Alternative 1) or replace (Alternative 2) the old machine. Prepare the analysis over the useful life of the new machine. b. Based only on the data presented, should the proposal be accepted? c. What are some of the other factors that should be considered before a final decision is made?

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
BuyFind

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

Solutions

Chapter
Section
Chapter 25, Problem 10E
Textbook Problem

Differential analysis for machine replacement

Boyer Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000, the accumulated depreciation is $24,000, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $180,000. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

Chapter 25, Problem 10E, Differential analysis for machine replacement Boyer Digital Components Company assembles circuit

  1. a. Prepare a differential analysis dated May 4 to determine whether to continue with ( Alternative 1) or replace (Alternative 2) the old machine. Prepare the analysis over the useful life of the new machine.
  2. b. Based only on the data presented, should the proposal be accepted?
  3. c. What are some of the other factors that should be considered before a final decision is made?

Expert Solution

a.

To determine

Prepare a differential analysis for Company BDC on May 4, to decide whether to continue with the old machine or to replace it.

Explanation of Solution

Differential Analysis: Differential analysis refers to the analysis of differential revenue which a company could gain or differential cost which a company could incur based on the available alternative options of business.

The differential analysis of income from both alternatives is shown below.

Differential Analysis of Company BDC
Continue (Alt. 1) or Replace (Alt. 2), Old Machine
May 4
 ParticularsContinue with Old Machine (Alternative 1)Replace the Old Machine (Alternative 2)Differential effect (Alternative 2)
Revenues   
    Sales (5 years)$1,025,000 $1,025,000 $0
Costs:  
�...
Expert Solution

b.

To determine

Explain would it be advisable to accept the proposal based on the data presented.

Expert Solution

c.

To determine

Enlist the other factors to be considered before taking the final decision.

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Chapter 25 Solutions

Financial And Managerial Accounting
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