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	$108,900
Annual depreciation (straight-line)	10,890
Annual manufacturing costs, excluding depreciation	38,500
Annual nonmanufacturing operating expenses	12,900
Annual revenue	94,800
Current estimated selling price of the machine	35,900
New Machine
Cost of machine, six-year life	$135,600
Annual depreciation (straight-line)	22,600
Estimated annual manufacturing costs, exclusive of depreciation	17,900

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

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".

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 is correct.

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)