Differential Analysis for Machine Replacement

Boyer Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $78,300, the accumulated depreciation is $31,300, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $162,900. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

	Present Operations		Proposed Operations
Sales	$248,200		$248,200
Direct materials	$84,600		$84,600
Direct labor	58,700
Power and maintenance	5,500		29,000
Taxes, insurance, etc.	2,000		6,500
Selling and administrative expenses	58,700		58,700
Total expenses	$209,500		$178,800

a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. 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) May 4

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Sales (5 years)	$fill in the blank b7b283f4ff81fa9_1	$fill in the blank b7b283f4ff81fa9_2	$fill in the blank b7b283f4ff81fa9_3
Costs:
Purchase price	fill in the blank b7b283f4ff81fa9_4	fill in the blank b7b283f4ff81fa9_5	fill in the blank b7b283f4ff81fa9_6
Direct materials (5 years)	fill in the blank b7b283f4ff81fa9_7	fill in the blank b7b283f4ff81fa9_8	fill in the blank b7b283f4ff81fa9_9
Direct labor (5 years)	fill in the blank b7b283f4ff81fa9_10	fill in the blank b7b283f4ff81fa9_11	fill in the blank b7b283f4ff81fa9_12
Power and maintenance (5 years)	fill in the blank b7b283f4ff81fa9_13	fill in the blank b7b283f4ff81fa9_14	fill in the blank b7b283f4ff81fa9_15
Taxes, insurance, etc. (5 years)	fill in the blank b7b283f4ff81fa9_16	fill in the blank b7b283f4ff81fa9_17	fill in the blank b7b283f4ff81fa9_18
Selling and admin. expenses (5 years)	fill in the blank b7b283f4ff81fa9_19	fill in the blank b7b283f4ff81fa9_20	fill in the blank b7b283f4ff81fa9_21
Profit (Loss)	$fill in the blank b7b283f4ff81fa9_22	$fill in the blank b7b283f4ff81fa9_23	$fill in the blank b7b283f4ff81fa9_24

b. Based only on the data presented, should the proposal be accepted?

Should be acceptedShould not be accepted

c. Differences in capacity between the two alternatives is

relevantnot relevant

to consider before a final decision is made