25.3

Differential Analysis for a Lease-or-Sell Decision

Inman Construction Company is considering selling excess machinery with a book value of $279,200 (original cost of $401,100 less accumulated depreciation of $121,900) for $276,200, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $286,500 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $26,400.

a. Prepare a differential analysis, dated May 25 to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
May 25
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$	$

b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.

The net from selling is $.

AND..

Sell or Process Further

Bunyon Lumber Company incurs a cost of $398 per hundred board feet (hbf) in processing certain "rough-cut" lumber, which it sells for $546 per hbf. An alternative is to produce a "finished cut" at a total processing cost of $525 per hbf, which can be sold for $772 per hbf.

Prepare a differential analysis dated August 9 on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2). For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Sell Rough-Cut (Alt. 1) or Process Further into Finished Cut (Alt. 2)
August 9
	Sell Rough-Cut (Alternative 1)	Process Further into Finished Cut (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per 100 board ft.	$	$	$
Costs, per 100 board ft.
Income (Loss), per 100 board ft.	$	$	$

Determine whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).