Differential Analysis for Machine Replacement

Ridgeway Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $51,200, the accumulated depreciation is $20,500, its remaining useful life is 5 years, and its residual value is negligible. On October 1 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 $106,500. The automatic machine has an estimated useful life of 5 years and no significant residual value. For use in evaluating the proposal, the managerial accountant accumulated the following annual data on present and proposed operations:

Line Item Description	Present Operations	Proposed Operations
Sales	$162,300	$162,300
Direct materials	$55,300	$55,300
Direct labor	38,400
Power and maintenance	3,600	18,900
Taxes, insurance, etc.	1,300	4,200
Selling and administrative expenses	38,400	38,400
Total expenses	$137,000	$116,800

Question Content Area

a. Prepare a differential analysis dated October 1 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Prepare the analysis over the useful life of the new machine. 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 October 1

Line Item Description	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:	blank	blank	blank
Sales (5 years)	$Sales (5 years)	$Sales (5 years)	$Sales (5 years)
Costs:
Purchase price	Purchase price	Purchase price	Purchase price
Direct materials (5 years)	Direct materials (5 years)	Direct materials (5 years)	Direct materials (5 years)
Direct labor (5 years)	Direct labor (5 years)	Direct labor (5 years)	Direct labor (5 years)
Power and maintenance (5 years)	Power and maintenance (5 years)	Power and maintenance (5 years)	Power and maintenance (5 years)
Taxes, insurance, etc. (5 years)	Taxes, insurance, etc. (5 years)	Taxes, insurance, etc. (5 years)	Taxes, insurance, etc. (5 years)
Selling and admin. expenses (5 years)	Selling and admin. expenses (5 years)	Selling and admin. expenses (5 years)	Selling and admin. expenses (5 years)
Profit (loss)	$Profit (loss)	$Profit (loss)	$Profit (loss)