Differential Analysis for Machine Replacement Proposal

Franklin Printing Company is considering replacing a machine that has been used in its factory for four 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, ten-year life	$109,100
Annual depreciation (straight-line)	10,910
Annual manufacturing costs, excluding depreciation	37,900
Annual nonmanufacturing operating expenses	11,400
Annual revenue	96,000
Current estimated selling price of the machine	35,800
New Machine
Cost of machine, six-year life	$139,200
Annual depreciation (straight-line)	23,200
Estimated annual manufacturing costs, exclusive of depreciation	17,300

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Required:

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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 profit that would result over the six-year period if the new machine is acquired. 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) November 8

	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)

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

Are there any improvements in the quality of work turned out by the new machine?

What opportunities are available for the use of the funds required to purchase the new machine?

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?

What affect would this decision have on employee morale?

None of these choices are correct.

a b c d e