Differential Analysis for Machine Replacement Proposal

Franklin 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:

Line Item Description	Amount
Cost of machine, 10-year life	$109,300
Annual depreciation (straight-line)	10,930
Annual manufacturing costs, excluding depreciation	38,500
Annual nonmanufacturing operating expenses	11,600
Annual revenue	95,100
Current estimated selling price of the machine	36,200

Line Item Description	Amount
Cost of machine, 6-year life	$137,400
Annual depreciation (straight-line)	22,900
Estimated annual manufacturing costs, exclusive of depreciation	17,400

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

Required:

Question Content Area

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 6-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.

Line Item Description	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues
Proceeds from sale of old machine	$Proceeds from sale of old machine	$Proceeds from sale of old machine	$Proceeds from sale of old machine
Costs
Purchase price	Purchase price	Purchase price	Purchase price
Annual manufacturing costs (6 yrs.)	Annual manufacturing costs (6 yrs.)	Annual manufacturing costs (6 yrs.)	Annual manufacturing costs (6 yrs.)
Profit (loss)	$Profit (loss)	$Profit (loss)	$Profit (loss)

Question Content Area

2. What other factors should be considered before a final decision is reached? a. Are there any improvements in the quality of work turned out by the new machine? b. What opportunities are available for the use of the funds required to purchase the new machine? c. 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? d. What affect would this decision have on employee morale? e. None of these choices are correct.