Differential Analysis Report for Machine Replacement

Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $91,300, the accumulated depreciation is $36,500, its remaining useful life is five years, and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $171,800. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on current and proposed operations:

	Current Operations		Proposed Operations
Sales	$289,400		$289,400
Direct materials	$98,600		$98,600
Direct labor	68,500		22,800
Power and maintenance	6,400		11,000
Taxes, insurance, etc.	2,300		7,600
Selling and administrative expenses	68,500		68,500
Total expenses	$244,300		$208,500

a. Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs anticipated.

LONE WOLF TECHNOLOGIES
Replace Machine
Differential Analysis Report
Annual costs and expensespresent machine	$
Annual costs and expensesnew machine
	$
Number of years applicable
	$
Cost of new machine
	$
Annual net differential decrease in costs and expensesnew machine	$

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

c. What are some of the other factors that should be considered before a final decision is made?

Do both present and proposed operations provide the same capacity?

What are the opportunity costs associated with alternative uses of the $171,800 outlay required to purchase the automatic machine?

Is the product improved by using automatic machinery?

What is the book value of the manually operated machine that will be replaced?

Select the relevant factor(s) from the list above.