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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

Line Item Description Amount

Cost of machine, $10-$year life $$106,500$

Annual depreciation $($straight$-$line$)10,650$

Annual manufacturing costs, excluding depreciation $37,900$

Annual nonmanufacturing operating expenses $13,200$

Annual revenue $94,000$

Current estimated selling price of the machine $35,600$

New Machine

Line Item Description Amount

Cost of machine, $6-$year life $$135,600$

Annual depreciation $($straight$-$line$)22,600$

Estimated annual manufacturing costs, exclusive of depreciation $17,200$

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

Required:

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$1.$ Prepare a differential analysis as of November $8$ comparing operations using the present machine $($Alternative $1)$ with operations using the new 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 $"0".$ If required, use a minus sign to indicate a loss.

Differential Analysis

Continue with Old Machine $($Alt$.1)$ or Replace Old Machine $($Alt$.2)$

November $8$

Line Item Description Continue with Old

Machine $($Alternative $1)$ Replace Old Machine

$($Alternative $2)$ Differential Effects

$($Alternative $2)$

Revenues

Proceeds from sale of old machine $Proceeds from sale of old machine

$Proceeds from sale of old machine

$Proceeds from sale of old machine

Costs

Purchase price Purchase price

Purchase price

Purchase price

Annual manufacturing costs $(6$ yrs$.)$ Annual manufacturing costs $(6$ yrs$.)$

Annual manufacturing costs $(6$ yrs$.)$

Annual manufacturing costs $(6$ yrs$.)$

Profit $($loss$)$ $Profit $($loss$)$

$Profit $($loss$)$

$Profit $($loss$)$

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

a$.$ Are there any improvements in the quality of work turned out by the new machine?

b$.$ What opportunities are available for the use of the funds required to purchase the new machine?

c$.$ 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?

d$.$ What affect would this decision have on employee morale?

e$.$ None of these choices are correct.

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