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Differential analysis for machine replacement Kim Kwon 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: Present Operations Proposed Operations Sales $205,000 $205,000 Direct materials $ 72,000 $ 72,000 Direct labor 51,000 — Power and maintenance 5,000 18.000 Taxes, insurance, etc. 1,500 4,000 Selling and administrative expenses 45,000 45,000 Total expenses $174,500 $139,000 a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). 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 other factors should be considered before a final decision is made?

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 25, Problem 25.10EX
Textbook Problem

Differential analysis for machine replacement

Kim Kwon 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:

 

Present

Operations

Proposed

Operations

Sales $205,000 $205,000
Direct materials $ 72,000 $ 72,000
Direct labor 51,000
Power and maintenance 5,000 18.000
Taxes, insurance, etc. 1,500 4,000
Selling and administrative expenses 45,000 45,000
Total expenses $174,500 $139,000

a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). 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 other factors should be considered before a final decision is made?

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Chapter 25 Solutions

Accounting
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