Differential Analysis for Machine Replacement Ridgeway Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $64,000, the accumulated depreciation is $25,600, its remaining useful life is 5 years, and its residual value is negligible. On October 1 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $133,100. The automatic machine has an estimated useful life of 5 years and no significant residual value. For use in evaluating the proposal, the managerial accountant accumulated the following annual data on present and proposed operations: Sales Direct materials Direct labor Power and maintenance Taxes, insurance, etc. Selling and administrative expenses Total expenses Present Proposed Operations Operations $202,900 $202,900 $69,100 $69,100 48,000 4,500 23,700 1,600 5,300 48,000 48,000 $171,200 $146,100 a. Prepare a differential analysis dated October 1 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Continue with (Alt. 1) or Replace (Alt. 2) Old Machine Line Item Description Revenues: October 1 Continue with Old Machine (Alternative 1) Replace Old Machine Differential Effects (Alternative 2) (Alternative 2) Sales (5 years) Costs: Purchase price Direct materials (5 years) Direct labor (5 years) Power and maintenance (5 years) Taxes, insurance, etc. (5 years) Selling and admin. expenses (5 years) Profit (loss) Feedback Check My Work a. For the continue and replace alternatives subtract the costs from the revenues. Multiply the sales and costs for the 5 year life. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2. b. Based only on the data presented, should the proposal be accepted? Should not be accepted c. Differences in capacity between the two alternatives is relevant to consider before a final decision is made.