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	$106,300
Annual depreciation (straight-line)	10,630
Annual manufacturing costs, excluding depreciation	39,500
Annual nonmanufacturing operating expenses	12,100
Annual revenue	94,600
Current estimated selling price of the machine	35,000
New Machine
Cost of machine, six-year life	$138,600
Annual depreciation (straight-line)	23,100
Estimated annual manufacturing costs, exclusive of depreciation	18,300

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 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?

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.