Differential AnalysisReport 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 $90,000, the accumulated depreciation is $36,000, 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 $169,400. 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:

CurrentOperations ProposedOperations

Sales $285,300 $285,300

Direct materials $97,200 $97,200

Direct labor 67,500 22,500

Power and maintenance 6,300 10,800

Taxes, insurance, etc. 2,300 7,500

Selling and administrative expenses 67,500 67,500

Total expenses $240,800 $205,500

a.Create 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 ________________

1.Choose Below $_______________

a.Annual differential decrease in costs and expenses

b.Annual differential increase in costs and expenses

Number of years applicable x________________

2.Choose Below $_________________

a.Total differential decrease in costs and expenses

b. Total differential increase in costs and expenses

Annual net differential decrease in costs and expensesnew machine $_____________

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

Choose Below

a.yes

b.no

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

1. Do both present and proposed operations provide the same capacity?
2. What are the opportunity costs associated with alternative uses of the $169,400 outlay required to purchase the automatic machine?
3. Is the product improved by using automatic machinery?
4. What is the book value of the manually operated machine that will be replaced?

Select the relevant factor(s) from the list above

a. 1 only

b. 1, 2, and 3 only

c. 2 and 3 only

d. 3 and 4 only

e. 1, 2, 3 and 4