DIFFERENTIAL ANALYSIS FOR MACHINE REPLACEMENT

Digital components company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000 the accumulated depreciation is $24,000, its remaining useful life is five years, and its residual value is negligible.On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $180,000. The automatic machine has an estimated useful life of five years and no significant residual value. For use in the evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations

Present Proposed

Operations Operations

Sales $205,000 $205,000

Direct material $72,000 $72,000

Direct labor $51,000

Power and maintenance $5,000 $18,000

Taxes, insurance, etc $1,500 $4,000

Selling and admin expenses$45,000 $45,000

Total expenses $174,500 $139,000

a.Make a differential analysis dated May 4 to determine whether to continue with the old machine ( Alternative1) or replace the old machine (Alternative 2) Perpare the analysis over the useful life of the new machine.

b. Based only on the data presented, should the proposal be accepted?

c. What other factors should be considered before a final decision is made?