Differential Analysis for Machine Replacement Proposal

Lexigraphic 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	$89,000
Annual depreciation (straight-line)	8,900
Annual manufacturing costs, excluding depreciation	23,600
Annual nonmanufacturing operating expenses	6,100
Annual revenue	74,200
Current estimated selling price of machine	29,700
New Machine
Purchase price of machine, six-year life	$119,700
Annual depreciation (straight-line)	19,950
Estimated annual manufacturing costs, excluding depreciation	6,900

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 April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential profit that would result over the six-year period if the new machine is acquired. If an amount is zero, enter "0". Use a minus sign to indicate a loss.

Differential Analysis Continue with (Alt. 1) or Replace (Alt. 2) Old Machine April 30

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect (Alternative 2)
Revenues:
Proceeds from sale of old machine	$fill in the blank ff8f55fae060fb4_1	$fill in the blank ff8f55fae060fb4_2	$fill in the blank ff8f55fae060fb4_3
Costs:
Purchase price	fill in the blank ff8f55fae060fb4_4	fill in the blank ff8f55fae060fb4_5	fill in the blank ff8f55fae060fb4_6
Annual manufacturing costs (6 yrs.)	fill in the blank ff8f55fae060fb4_7	fill in the blank ff8f55fae060fb4_8	fill in the blank ff8f55fae060fb4_9
Profit (loss)	$fill in the blank ff8f55fae060fb4_10	$fill in the blank ff8f55fae060fb4_11	$fill in the blank ff8f55fae060fb4_12

1. Determine the manufacturing costs to continue with the old machine for six years at the current amount. Determine the manufacturing costs with the replacement machine for six years. Determine the effect of the purchase price of the replacement and the sale proceeds of the old machine. Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1.

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2.

a. The federal taxes payable need not be considered for machine replacement proposal. State whether the statement is true or false.

b. Identify the factor that needs to be considered for asset replacement decision in a company.

(a) The quality of the machine and its working capacity.

(b) The federal taxes payable.

(c) The amount of investment required to replace or purchase the new machine.

(d) All the above.