Differential Analysis for Machine Replacement Proposal

Gutenberg Publishers Inc. is considering replacing a machine that has been used in its factory for $4$ 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 MachineLine Item DescriptionAmountCost of machine, $10-$year life$$120,000$Annual depreciation $($straight$-$line$)12,000$Annual manufacturing costs, excluding depreciation$30,000$Annual nonmanufacturing operating expenses$22,500$Annual revenue$90,000$Current estimated selling price of the machine$40,000$

New MachineLine Item DescriptionAmountPurchase price of machine, $6-$year life$$160,000$Annual depreciation $($straight$-$line$)16,000$Estimated annual manufacturing costs, excluding depreciation$7,500$

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

Required:

Question Content Area

$1.$Prepare a differential analysis as of November $30$ comparing operations using the present machine $($Alternative $1)$ with operations using the new machine $($Alternative $2).$ The analysis should indicate the total differential profit that would result over the $6-$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 $($Alt$.1)$ or Replace $($Alt$.2)$ Old Machine

November $30$Line Item DescriptionContinue with Old

Machine $($Alternative $1)$Replace Old Machine

$($Alternative $2)$Differential Effect

$($Alternative $2)$Revenues:Proceeds from sale of old machine$Proceeds from sale of old machine$Proceeds from sale of old machine$Proceeds from sale of old machineCosts:Purchase pricePurchase pricePurchase pricePurchase priceAnnual manufacturing costs $(6$ yrs$.)$Annual manufacturing costs $(6$ yrs$.)$Annual manufacturing costs $(6$ yrs$.)$Annual manufacturing costs $(6$ yrs$.)$Profit $($loss$)$$Profit $($loss$)$$Profit $($loss$)$$Profit $($loss$)$

Question Content Area

$2.$ Identify the factor that needs to be considered for asset replacement decision in a company.

a$.$ The quality of the machine and its working capacity

b$.$ The federal taxes payable

c$.$ The amount of investment required to replace or purchase the new machine

d$.$ All the above

abcd