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 $67,700, the accumulated depreciation is $27,100, 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 $140,800. 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 $214,600   $214,600   Direct materials $73,100   $73,100   Direct labor 50,800   —   Power and maintenance 4,700   25,000   Taxes, insurance, etc. 1,700   5,600   Selling and administrative expenses 50,800   50,800   Total expenses $181,100   $154,500   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. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) May 4   Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues:       Sales (5 years) $ $ $ Costs:       Purchase price       Direct materials (5 years)       Direct labor (5 years)       Power and maintenance (5 years)       Taxes, insurance, etc. (5 years)       Selling and admin. expenses (5 years)       Income (Loss) $ $ $ b.  Based only on the data presented, should the proposal be accepted?   c.  Differences in capacity between the two alternatives is   to consider before a final decision is made.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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  1. 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 $67,700, the accumulated depreciation is $27,100, 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 $140,800. 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 $214,600   $214,600  
    Direct materials $73,100   $73,100  
    Direct labor 50,800    
    Power and maintenance 4,700   25,000  
    Taxes, insurance, etc. 1,700   5,600  
    Selling and administrative expenses 50,800   50,800  
    Total expenses $181,100   $154,500  

    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. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

    Differential Analysis
    Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
    May 4
      Continue
    with Old
    Machine
    (Alternative 1)
    Replace
    Old
    Machine
    (Alternative 2)
    Differential
    Effect
    on Income
    (Alternative 2)
    Revenues:      
    Sales (5 years) $ $ $
    Costs:      
    Purchase price      
    Direct materials (5 years)      
    Direct labor (5 years)      
    Power and maintenance (5 years)      
    Taxes, insurance, etc. (5 years)      
    Selling and admin. expenses (5 years)      
    Income (Loss) $ $ $

    b.  Based only on the data presented, should the proposal be accepted?
     

    c.  Differences in capacity between the two alternatives is   to consider before a final decision is made.

 
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