Question
Differential Analysis Report for Machine Replacement Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original
Differential Analysis Report for Machine Replacement
Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $75,000, the accumulated depreciation is $30,000, its remaining useful life is eight years, and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $160,000. The automatic machine has an estimated useful life of eight years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on current and proposed operations:
Current Operations | Proposed Operations | |||
Sales | $3,800,000 | $3,800,000 | ||
Direct materials | $500,000 | $500,000 | ||
Direct labor | 150,000 | 50,000 | ||
Power and maintenance | 10,000 | 60,000 | ||
Taxes, insurance, etc. | 5,000 | 12,000 | ||
Selling and administrative expenses | 200,000 | 200,000 | ||
Total expenses | $865,000 | $822,000 |
a. Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the eight years and the net annual differential change in costs anticipated.
LONE WOLF TECHNOLOGIES | |
Replace Machine | |
Differential Analysis Report | |
Annual costs and expensespresent machine | $ |
Annual costs and expensesnew machine | |
ANSWER IS ONE OR THE OTHER
| $ |
Number of years applicable | |
ANSWER IS ONE OR THE OTHER
| $ |
Cost of new machine | |
ANSWER IS ONE OR THE OTHER
| $ |
Annual net differential decrease in costs and expensesnew machine | $ |
b. Based only on the data presented, should the proposal be accepted?
ANSWER IS ONE OR THE OTHER
- Yes
- No
c. What are some of the other factors that should be considered before a final decision is made?
- Do both present and proposed operations provide the same capacity?
- What are the opportunity costs associated with alternative uses of the $160,000 outlay required to purchase the automatic machine?
- Is the product improved by using automatic machinery?
- What is the book value of the manually operated machine that will be replaced?
Select the relevant factor(s) from the list above. ANSWER IS ONE OF THESE BELOW:
- 1 only
- 1, 2, and 3 only
- 2 and 3 only
- 3 and 4 only
- 1, 2, 3 and 4
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