Differential Analysis for Machine Replacement

Kim Kwon 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 5 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 5 years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

	Present Operations		Proposed Operations
Sales	$205,000		$205,000
Direct materials	$72,000		$72,000
Direct labor	51,000
Power and maintenance	5,000		18,000
Taxes, insurance, etc.	1,500		4,000
Selling and administrative expenses	45,000		45,000
Total expenses	$174,500		$139,000

Question Content Area

a. Prepare a differential analysis dated May 4 to determine whether to Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Sales (5 years)	$fill in the blank 4d1e0b0a5fe7025_1	$fill in the blank 4d1e0b0a5fe7025_2	$fill in the blank 4d1e0b0a5fe7025_3
Costs:
Purchase price	fill in the blank 4d1e0b0a5fe7025_4	fill in the blank 4d1e0b0a5fe7025_5	fill in the blank 4d1e0b0a5fe7025_6
Direct materials (5 years)	fill in the blank 4d1e0b0a5fe7025_7	fill in the blank 4d1e0b0a5fe7025_8	fill in the blank 4d1e0b0a5fe7025_9
Direct labor (5 years)	fill in the blank 4d1e0b0a5fe7025_10	fill in the blank 4d1e0b0a5fe7025_11	fill in the blank 4d1e0b0a5fe7025_12
Power and maintenance (5 years)	fill in the blank 4d1e0b0a5fe7025_13	fill in the blank 4d1e0b0a5fe7025_14	fill in the blank 4d1e0b0a5fe7025_15
Taxes, insurance, etc. (5 years)	fill in the blank 4d1e0b0a5fe7025_16	fill in the blank 4d1e0b0a5fe7025_17	fill in the blank 4d1e0b0a5fe7025_18
Selling and admin. expenses (5 years)	fill in the blank 4d1e0b0a5fe7025_19	fill in the blank 4d1e0b0a5fe7025_20	fill in the blank 4d1e0b0a5fe7025_21
Profit (loss)	$fill in the blank 4d1e0b0a5fe7025_22	$fill in the blank 4d1e0b0a5fe7025_23	$fill in the blank 4d1e0b0a5fe7025_24

Question Content Area

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

Should be acceptedShould not be accepted

c. Differences in capacity between the two alternatives is

relevantnot relevant

to consider before a final decision is made.