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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.

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285743615

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Chapter
Section
BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285743615
Chapter 25, Problem 25.2BPR
Textbook Problem
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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 of Solution

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.

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Chapter 25 Solutions

Accounting (Text Only)
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