Question
Differential Analysis Report for Machine Replacement Proposal Flint Tooling Company is considering replacing a machine that has been used in its factory for four years.
Differential Analysis Report for Machine Replacement Proposal
Flint Tooling 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 | $109,500 |
Annual depreciation (straight-line) | 10,950 |
Annual manufacturing costs, excluding depreciation | 38,700 |
Annual nonmanufacturing operating expenses | 11,700 |
Annual revenue | 94,100 |
Current estimated selling price of the machine | 35,200 |
New Machine | |
Cost of machine, six-year life | $136,200 |
Annual depreciation (straight-line) | 22,700 |
Estimated annual manufacturing costs, exclusive of depreciation | 17,500 |
Annual nonmanufacturing operation expenses | 10,000 |
Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.
Required:
1. Prepare a differential analysis report comparing operations utilizing the new machine with operations using the old machine. The analysis should indicate the differential income that would result over the six-year period if the new machine is acquired. Enter all amounts as positive numbers.
Flint Tooling Company | |
Proposal to Replace Machine | |
Annual manufacturing costs associated with present machine | $ |
Annual manufacturing costs associated with proposed new machine | |
Annual reduction in manufacturing costs | $ |
Number of years applicable | x |
Cost reduction attributable to difference in manufacturing costs | $ |
Proceeds from sale of present machine | |
$ | |
Cost of new machine | |
Differential income anticipated from replacement, six-year total | $ |
2. What are some of the other factors that should be considered before a final decision is made?
- Are there any improvements in the quality of work turned out by the new machine?
- What other opportunities are available for the use of the funds that are required to purchase the new machine?
- What effect does the federal income tax have on the decision?
- What is the book value of the machine that will be replaced?
Select the relevant factor(s) from the list above.
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