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 $$59,800,$ the accumulated depreciation is $$23,900,$ 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 $$124,400.$ 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:

Line Item Description Present

Operations Proposed

Operations

Sales $$189,600$ $$189,600$

Direct materials $$64,600$ $$64,600$

Direct labor $44,900$

Power and maintenance $4,20022,100$

Taxes, insurance, etc. $1,5005,000$

Selling and administrative expenses $44,90044,900$

Total expenses $$160,100$ $$136,600$

Question Content Area

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

October $1$

Line Item Description Continue with

Old Machine

$($Alternative $1)$ Replace Old Machine

$($Alternative $2)$ Differential Effects

$($Alternative $2)$

Revenues: blank blank blank

Sales $(5$ years$)$ $Sales $(5$ years$)$

$Sales $(5$ years$)$

$Sales $(5$ years$)$

Costs:

Purchase price Purchase price

Purchase price

Purchase price

Direct materials $(5$ years$)$ Direct materials $(5$ years$)$

Direct materials $(5$ years$)$

Direct materials $(5$ years$)$

Direct labor $(5$ years$)$ Direct labor $(5$ years$)$

Direct labor $(5$ years$)$

Direct labor $(5$ years$)$

Power and maintenance $(5$ years$)$ Power and maintenance $(5$ years$)$

Power and maintenance $(5$ years$)$

Power and maintenance $(5$ years$)$

Taxes, insurance, etc. $(5$ years$)$ Taxes, insurance, etc. $(5$ years$)$

Taxes, insurance, etc. $(5$ years$)$

Taxes, insurance, etc. $(5$ years$)$

Selling and admin. expenses $(5$ years$)$ Selling and admin. expenses $(5$ years$)$

Selling and admin. expenses $(5$ years$)$

Selling and admin. expenses $(5$ years$)$

Profit $($loss$)$ $Profit $($loss$)$

$Profit $($loss$)$

$Profit $($loss$)$

Question Content Area

b$.$ Based only on the data presented, should the proposal be accepted?

c$.$ Differences in capacity between the two alternatives is

to consider before a final decision is made.