27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
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:






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?


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.

To Prepare: The differential analysis of Company KKDC on May 4, to decide whether to continue with the old machine or to replace it.


The differential analysis of Company KKDC on May 4, for the given alternatives is shown below.

Differential Analysis of Company KKDC
Continue (Alt. 1) or Replace (Alt. 2), Old Machine
May 4
Continue with
Old Machine  (Alternative 1)
Replace the
Old Machine  (Alternative 2)
Differential Effect on income
    Sales (5 years) $1,025,000 $1,025,000 $0
   Purchase Price $0 (-)  $180,000 (-)  $180,000
   Direct Materials (5 years) (-)  $360,000 (-)  $360,000 $0
   Direct La...


To determine

To Explain: On the basis of differential analysis, the proposal to be accepted.


To determine

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

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