Differential Analysis for Machine Replacement Proposal

Fontasia Printing Company is considering replacing a machine that has been used in its factory for 4 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, 10-year life	$76,000
Annual depreciation (straight-line)	7,600
Annual manufacturing costs, excluding depreciation	20,100
Annual nonmanufacturing operating expenses	5,200
Annual revenue	63,400
Current estimated selling price of machine	25,500
New Machine
Purchase price of machine, 6-year life	$102,300
Annual depreciation (straight-line)	17,050
Estimated annual manufacturing costs, excluding depreciation	5,900

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 April 30 to determine whether to Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2). The analysis should indicate the total differential profit that would result over the 6-year period if the new machine is acquired. If an amount is zero, enter zero "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 30
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Proceeds from sale of old machine
Costs:
Purchase price
Annual manufacturing costs (6 yrs.)
Profit (loss)

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 is correct.