1.)Differential Analysis Involving Opportunity Costs

On July 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $148,000 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:

Cost of store equipment		$148,000
Life of store equipment		16 years
Estimated residual value of store equipment		$18,200
Yearly costs to operate the warehouse, excluding depreciation of equipment
	depreciation of store equipment	$55,800
Yearly expected revenuesyears 1-8		75,700
Yearly expected revenuesyears 9-16		69,400

Required:

1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2)
July 1
	Operate Warehouse (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Costs to operate warehouse
Cost of equipment less residual value
Income (Loss)	$	$	$

2. Based on the results disclosed by the differential analysis, should the proposal to operate a retail store be accepted?

3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 16 years? $

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2.)Differential Analysis for Machine Replacement Proposal

Flint Tooling Company is considering replacing a machine that has been used in its factory for four 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, ten-year life	$107,800
Annual depreciation (straight-line)	10,780
Annual manufacturing costs, excluding depreciation	38,000
Annual nonmanufacturing operating expenses	13,000
Annual revenue	94,100
Current estimated selling price of the machine	35,100
New Machine
Cost of machine, six-year life	$138,600
Annual depreciation (straight-line)	23,100
Estimated annual manufacturing costs, exclusive of depreciation	17,700

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 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. If an amount is zero, enter "0". Use a minus sign to indicate subtracted amounts, negative amounts, or a loss.

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 Effect on Income (Alternative 2)
Revenues
Proceeds from sale of old machine	$	$	$
Costs
Purchase price
Annual manufacturing costs (6 yrs.)
Income (Loss)	$	$	$