Differential Analysis for a Lease-or-Sell Decision

Sure-Bilt Construction Company is considering selling excess machinery with a book value of $276,400 (original cost of $398,200 less accumulated depreciation of $121,800) for $274,300, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $283,400 for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $24,500.

a. Prepare a differential analysis, dated May 25 to determine whether Sure-Bilt 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 $.

Differential Analysis for a Discontinued Product

A condensed income statement by product line for Crown Beverage Inc. indicated the following for Royal Cola for the past year:

Sales	$232,900
Cost of goods sold	112,000
Gross profit	$120,900
Operating expenses	146,000
Loss from operations	$(25,100)

It is estimated that 12% of the cost of goods sold represents fixed factory overhead costs and that 23% of the operating expenses are fixed. Since Royal Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

a. Prepare a differential analysis, dated March 3, to determine whether Royal Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue Royal Cola (Alt. 1) or Discontinue Royal Cola (Alt. 2)
January 21
	Continue Royal Cola (Alternative 1)	Discontinue Royal Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)	$	$	$

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would by $ if the product is discontinued.

Make-or-Buy Decision

Matchless Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $56 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 37% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$25
Direct labor	22
Factory overhead (37% of direct labor)	8.14
Total cost per unit	$55.14

If Matchless 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 13% of the direct labor costs.

a. Prepare a differential analysis dated February 24 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". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
February 24
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales Price	$	$	$
Costs:
Purchase price	$	$	$
Direct materials per unit
Direct labor per unit
Variable factory overhead per unit
Fixed factory overhead per unit
Income (Loss)	$	$	$

b. Assuming there were no better alternative uses for the spare capacity, it would to manufacture the carrying cases. Fixed factory overhead is to this decision.

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Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $600,600 and has $347,000 of accumulated depreciation to date, with a new machine that has a purchase price of $483,200. The old machine could be sold for $64,500. The annual variable production costs associated with the old machine are estimated to be $155,400 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,600 per year for eight years.

a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. 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
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 29
	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
Variable productions costs (8 years)
Income (Loss)	$	$	$

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

b. What is the sunk cost in this situation?

The sunk cost is $.