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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 machine replacement proposal

Lexigraphic Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Old Machine
Cost of machine, 10-year life $89,000
Annual depreciation (straight-line) 8,900
Annual manufacturing costs, excluding depreciation 23,600
Annual nonmanufacturing operating expenses 6,100
Annual revenue 74,200
Current estimated selling price of machine 29,700
New Machine  
Purchase price of machine, six-year life $119,700
Annual depreciation (straight-line) 19,950
Estimated annual manufacturing costs, excluding depreciation 6,900

Instructions

1.    Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired.

2.    List other factors that should be considered before a final decision is reached.

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 LP as on April 30, for given alternatives.

Explanation

The differential analysis of Company LP as on April 30, for given alternatives is shown below.

Differential Analysis of Company LP
Continue (Alt. 1) or Replace (Alt. 2), Old Machine
April 30
Continue with
Old Machine  (Alternative 1)
Replace the
Old Machine  (Alternative 2)
Differential Effect on income
Revenues
    Proceeds from Old Machine $0 $29,700 $29,700
Costs:
   Purchase Price $0 (-)  $119,700 (-)  $119,700
   Direct Labor (6years) (1) (-)  $141,600 (2) (-)  $41,400 $100,200
Income (loss) (-)  $141,600 (-)  $131,400 $10,200

 Table (1)

Differential analysis of Company LP as on April 30, shows that continuing with the old machine shall increase the losses by $10,200; hence the old machine should be replaced with the new machine...

b)

To determine

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

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