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Differential Analysis for Machine Replacement Proposal

Franklin Printing Company 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 Machine
Cost of machine, 10-year life	$107,000
Annual depreciation (straight-line)	10,700
Annual manufacturing costs, excluding depreciation	39,200
Annual nonmanufacturing operating expenses	12,500
Annual revenue	95,700
Current estimated selling price of the machine	36,900
New Machine
Cost of machine, 6-year life	$138,600
Annual depreciation (straight-line)	23,100
Estimated annual manufacturing costs, exclusive of depreciation	18,900

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

Required:

1. Prepare a differential analysis as of November 8 to determine whether to Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2). The analysis should indicate the differential profit that would result over the 6-year period if the new machine is acquired. If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) November 8

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues
Proceeds from sale of old machine	$fill in the blank e2f8f3f2605004d_1	$fill in the blank e2f8f3f2605004d_2	$fill in the blank e2f8f3f2605004d_3
Costs
Purchase price	fill in the blank e2f8f3f2605004d_4	fill in the blank e2f8f3f2605004d_5	fill in the blank e2f8f3f2605004d_6
Annual manufacturing costs (6 yrs.)	fill in the blank e2f8f3f2605004d_7	fill in the blank e2f8f3f2605004d_8	fill in the blank e2f8f3f2605004d_9
Profit (loss)	$fill in the blank e2f8f3f2605004d_10	$fill in the blank e2f8f3f2605004d_11	$fill in the blank e2f8f3f2605004d_12

Feedback

1. Determine the manufacturing costs to continue with the old machine for six years at the current amount. Determine the manufacturing costs with the replacement machine for six years. Determine the effect of the purchase price of the replacement and the sale proceeds of the old machine. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

2. What other factors should be considered before a final decision is reached?

1. Are there any improvements in the quality of work turned out by the new machine?
2. What opportunities are available for the use of the funds required to purchase the new machine?
3. Are there any improvements in the quality of work turned out by the new machine and what opportunities are available for the use of the funds required to purchase the new machine?
4. What affect would this decision have on employee morale?
5. None of these choices is correct.

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