Question: Saginaw Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of
Saginaw 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, 8-year life .............. $ 96,000
Annual depreciation (straight-line) ........... 12,000
Annual manufacturing costs, excluding depreciation ..... 26,000
Annual nonmanufacturing operating expenses ........ 9,500
Annual revenue ................... 45,000
Current estimated selling price of the machine ....... 58,000
New Machine
Cost of machine, 6-year life .............. $126,000
Annual depreciation (straight-line) ............. 21,000
Estimated annual manufacturing costs, exclusive of depreciation . 9,000
Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.
Instructions
1. Prepare a differential analysis report as of March 22, 2008, comparing operations utilizing the new machine with operations using the present equipment. The analysis should indicate the differential income that would result over the 6-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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