Differential Analysis for Machine Replacement Proposal

Flint Tooling Company is considering replacing a machine that has been used in its factory for two 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, eight-year life	$38,000
Annual depreciation (straight-line)	4,750
Annual manufacturing costs, excluding depreciation	12,400
Annual nonmanufacturing operating expenses	2,700
Annual revenue	32,400
Current estimated selling price of the machine	12,900
New Machine
Cost of machine, six-year life	$57,000
Annual depreciation (straight-line)	9,500
Estimated annual manufacturing costs, exclusive of depreciation	3,400

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 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)	$	$	$

Feedback

1. Determine the manufacturing costs to continue with the old machine for six years at the current amount. Determine the manufacturing costs with the replacement machine for six years. Determine the effect of the purchase price of the replacement and the sale proceeds of the old machine. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

Learning Objective 1.

2. What other factors should be considered before a final decision is reached?

1. Are there any improvements in the quality of work turned out by the new machine?
2. What opportunities are available for the use of the funds required to purchase the new machine?
3. Are there any improvements in the quality of work turned out by the new machine and what opportunities are available for the use of the funds required to purchase the new machine?
4. What effect would this decision have on employee morale?
5. None of these choices are correct.

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