Differential Analysis for Machine Replacement Proposal

Franklin Printing Company is considering replacing a machine that has been used in its factory for four 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, ten-year life	$110,000
Annual depreciation (straight-line)	11,000
Annual manufacturing costs, excluding depreciation	39,100
Annual nonmanufacturing operating expenses	11,300
Annual revenue	94,600
Current estimated selling price of the machine	35,900
New Machine
Cost of machine, six-year life	$138,000
Annual depreciation (straight-line)	23,000
Estimated annual manufacturing costs, exclusive of depreciation	17,700

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

Required:

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 profit that would result over the six-year period if the new machine is acquired. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) November 8 Continue with Replace Old Machine Old Machine (Alternative 1) (Alternative 2) Differential Effects (Alternative 2) Revenues Proceeds from sale of old machine 35,900 35,900 Costs Purchase price 0 -138,000 -138,000 Annual manufacturing costs (6 yrs.) Profit (loss)