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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Differential analysis for a lease-or-sell decision

Matrix Construction Company is considering selling excess machinery with a book value of $75.000 (original cost of $200.000 less accumulated depreciation of $125,000) for $60,000 less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $75,000 for five years, after which it is expected to have no residual value. During the period of the lease. Matrix Construction Company’s costs of repairs, insurance, and property tax expenses are expected to be $21,500.

a.    Prepare a differential analysis dated May 25 to determine whether Matrix should lease (Alternative 1) or sell (Alternative 2) the machinery.

b.    On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.

a)

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 M as on May 25.

Explanation

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

...
Differential analysis for Company M
Lease Machine (Alt. 1) or Sell Machine (Alt. 2)
May 25
Lease Machine (Alternative 1) Sell Machine (Alternative 2) Differential effect on income

b)

To determine

To Advise: Whether the Company M should sell or lease the machine.

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