BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Solutions

Chapter
Section
BuyFindarrow_forward

Accounting

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

Differential analysis for machine replacement proposal

Flint Tooling Company is considering replacing a machine that has been used in its factory for two 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:

Old Machine
Cost of machine, eight-year life $38,000
Annual depreciation (straight-line) 4,750
Annual manufacturing costs, excluding depreciation 12,400
Annual nonmanufacturing operating expenses 2,700
Annual revenue 32,400
Current estimated selling price of the machine 12,900
New Machine  
Cost of machine, six-year life $57,000
Annual depreciation (straight-line) 9,500
Estimated annual manufacturing costs, exclusive of depreciation 3,400

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

Instructions

1.    Prepare a differential analysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the 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 FT as on November 8, for given alternatives.

Explanation

The differential analysis of Company FT as on November 8, for given alternatives is shown below.

Differential Analysis of Company FT
Continue (Alt. 1) or Replace (Alt. 2), Old Machine
November 8
Continue with
Old Machine  (Alternative 1)
Replace the
Old Machine  (Alternative 2)
Differential Effect on income
Revenues
    Proceeds from Old Machine $0 $12,900 $12,900
Costs:
   Purchase Price $0 (-)  $57,000 (-)  $57,000
   Direct Labor (6years) (-)  $74,400 (-)  $20,400 $54,000
Income (loss) (-)  $74,400 (-)  $64,500 $9,900

 Table (1)

Differential analysis of Company FT as on November 8, shows that continuing with the old machine shall increase the losses by $9,900; 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.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

What is the maturity date of a bond?

Cornerstones of Financial Accounting

Explain why the long-run aggregate-supply curve is vertical.

Principles of Macroeconomics (MindTap Course List)

What is cultural diversity in an organization?

Foundations of Business (MindTap Course List)

Why do economists make assumptions?

Essentials of Economics (MindTap Course List)

Identify four measures of profitability calculated by FCI.

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects,...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)