Differential Analysis for a Lease or Sell Decision

Burlington Construction Company is considering selling excess machinery with a book value of $280,900 (original cost of $401,800 less accumulated depreciation of $120,900) for $278,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $287,400 for five years, after which it is expected to have no residual value. During the period of the lease, Burlington Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,300.

Question Content Area

a. DO a differential analysis dated January 15 to determine whether Burlington Construction Company should lease (Alternative 1) or sell (Alternative 2) the machinery. If required, use a minus sign to indicate a loss.

	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 5d5afaf73033063_1	$fill in the blank 5d5afaf73033063_2	$fill in the blank 5d5afaf73033063_3
Costs	fill in the blank 5d5afaf73033063_4	fill in the blank 5d5afaf73033063_5	fill in the blank 5d5afaf73033063_6
Profit (Loss)	$fill in the blank 5d5afaf73033063_7	$fill in the blank 5d5afaf73033063_8	$fill in the blank 5d5afaf73033063_9

Question Content Area

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

Lease the machinerySell the machinery

Make-or-Buy Decision

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $60 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$27
Direct labor	21
Factory overhead (40% of direct labor)	8.4
Total cost per unit	$56.4

If Somerset Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 16% of the direct labor costs.

Question Content Area

a. DO a differential analysis dated April 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "0".

	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effects (Alternative 2)
Unit costs:
Purchase price	$fill in the blank 452a67f7afe2fb1_1	$fill in the blank 452a67f7afe2fb1_2	$fill in the blank 452a67f7afe2fb1_3
Direct materials	fill in the blank 452a67f7afe2fb1_4	fill in the blank 452a67f7afe2fb1_5	fill in the blank 452a67f7afe2fb1_6
Direct labor	fill in the blank 452a67f7afe2fb1_7	fill in the blank 452a67f7afe2fb1_8	fill in the blank 452a67f7afe2fb1_9
Variable factory overhead	fill in the blank 452a67f7afe2fb1_10	fill in the blank 452a67f7afe2fb1_11	fill in the blank 452a67f7afe2fb1_12
Fixed factory overhead	fill in the blank 452a67f7afe2fb1_13	fill in the blank 452a67f7afe2fb1_14	fill in the blank 452a67f7afe2fb1_15
Total unit costs	$fill in the blank 452a67f7afe2fb1_16	$fill in the blank 452a67f7afe2fb1_17	$fill in the blank 452a67f7afe2fb1_18

Question Content Area

b. Assuming there were no better alternative uses for the spare capacity, it would

be advisablenot be advisable

to manufacture the carrying cases. Fixed factory overhead is

relevantirrelevant

to this decision.

Sell or Process Further

Calgary Lumber Company incurs a cost of $374 per hundred board feet (hbf) in processing certain "rough-cut" lumber, which it sells for $556 per hbf. An alternative is to produce a "finished-cut" at a total processing cost of $525 per hbf, which can be sold for $752 per hbf.

Question Content Area

a. Do a differential analysis dated March 15 on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

	Sell Rough-Cut (Alternative 1)	Process Further into Finished-Cut (Alternative 2)	Differential Effects (Alternative 2)
Revenues, per 100 board ft.	$fill in the blank 98bc5402302dfb2_1	$fill in the blank 98bc5402302dfb2_2	$fill in the blank 98bc5402302dfb2_3
Costs, per 100 board ft.	fill in the blank 98bc5402302dfb2_4	fill in the blank 98bc5402302dfb2_5	fill in the blank 98bc5402302dfb2_6
Profit (Loss), per 100 board ft.	$fill in the blank 98bc5402302dfb2_7	$fill in the blank 98bc5402302dfb2_8	$fill in the blank 98bc5402302dfb2_9

Question Content Area

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

Sell rough-cut lumber.Process further and sell finished-cut lumber.

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $599,000 and has $348,800 of accumulated depreciation to date, with a new machine that has a purchase price of $486,600. The old machine could be sold for $64,000. The annual variable production costs associated with the old machine are estimated to be $157,800 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,700 per year for eight years.

Question Content Area

a.1 DO a differential analysis dated May 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

	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 7194fe06eff004a_1	$fill in the blank 7194fe06eff004a_2	$fill in the blank 7194fe06eff004a_3
Costs:
Purchase price	fill in the blank 7194fe06eff004a_4	fill in the blank 7194fe06eff004a_5	fill in the blank 7194fe06eff004a_6
Variable productions costs (8 years)	fill in the blank 7194fe06eff004a_7	fill in the blank 7194fe06eff004a_8	fill in the blank 7194fe06eff004a_9
Profit (Loss)	$fill in the blank 7194fe06eff004a_10	$fill in the blank 7194fe06eff004a_11	$fill in the blank 7194fe06eff004a_12

Question Content Area

a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

Continue with the old machineReplace the old machine

Question Content Area

b. What is the sunk cost in this situation?

The sunk cost is $fill in the blank 5bcb090dc05dfd1_1.

Differential Analysis for a Discontinued Product

The condensed product-line income statement for Rhinebeck Company for the month of October is as follows:

Rhinebeck Company Product-Line Income Statement For the Month Ended October 31
	Hats		Gloves		Mufflers
Sales	$64,300			$88,400			$27,100
Cost of goods sold	(26,800)			(32,400)			(15,700)
Gross profit	$37,500			$56,000			$11,400
Selling and administrative expenses	(29,000)			(33,900)			(16,400)
Operating income (loss)	$8,500			$22,100			$(5,000)

Fixed costs are 14% of the cost of goods sold and 35% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued.

Question Content Area

a. DO a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

	Continue Mufflers (Alternative 1)	Discontinue Mufflers (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$fill in the blank 073eaa000f8a05b_1	$fill in the blank 073eaa000f8a05b_2	$fill in the blank 073eaa000f8a05b_3
Costs:
Variable cost of goods sold	fill in the blank 073eaa000f8a05b_4	fill in the blank 073eaa000f8a05b_5	fill in the blank 073eaa000f8a05b_6
Variable selling and admin. expenses	fill in the blank 073eaa000f8a05b_7	fill in the blank 073eaa000f8a05b_8	fill in the blank 073eaa000f8a05b_9
Fixed costs	fill in the blank 073eaa000f8a05b_10	fill in the blank 073eaa000f8a05b_11	fill in the blank 073eaa000f8a05b_12
Profit (Loss)	$fill in the blank 073eaa000f8a05b_13	$fill in the blank 073eaa000f8a05b_14	$fill in the blank 073eaa000f8a05b_15

Question Content Area

b. Should the Mufflers line be retained?

YesNo