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 $84,200, the accumulated depreciation is $33,700, 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 $175,100. 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	$266,900	$266,900
Direct materials	$90,900	$90,900
Direct labor	63,200
Power and maintenance	5,900	31,200
Taxes, insurance, etc.	2,100	7,000
Selling and administrative expenses	63,200	63,200
Total expenses	$225,300	$192,300

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)

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.