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, 10-year life $106,500 Annual depreciation (straight-line) 10,650 Annual manufacturing costs, excluding depreciation 38,400 Annual nonmanufacturing operating expenses 12,700 Annual revenue 94,300 Current estimated selling price of the machine 35,700 New Machine Cost of machine, six-year life $137,400 Annual depreciation (straight-line) 22,900 Estimated annual manufacturing costs, exclusive of depreciation 18,700 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 February 28, 2014, comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. If an amount is zero, enter zero "0".

Differential Analysis

Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)

February 28, 2014

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)

$

$

$

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 affect would this decision have on employee morale?
5. None of these choices is correct.