Differential Analysis Report for Machine Replacement

Singapore Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000, the accumulated depreciation is $24,000, its remaining useful life is five years, and its residual value is negligible. On February 20, 20Y9, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $111,000. The automatic machine has an estimated useful life of ve years and no signicant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: Present Proposed Operations Operations Sales W w Direct materials 35 86,000 3 86.000 Direct labor 40,000 Power and maintenance 8,000 30,000 Taxes, insurance. etc. 4,000 7,000 Selling and administrative expenses 65,000 65,000 Total expenses $203,000 $188,000 Instructions: 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 ve years and the net annual differential change in costs anticipated. b. Based only on the data presented, should the proposal be accepted or not? Proposal to Replace Machine February 20, 20Y9 Annual costs and expenses - present machine Annual costs and expenses - new machine Annual differential decrease in costs and expenses Number of years applicable Total differential decrease in costs and expenses Cost of new equipment Net differential increase in costs and expenses, 5-year total Annual differential increase in costs and expenses - new machine Calculations for annual differential decrease in costs and expenses: Decrease in direct labor costs Less: Increase in power and maintenance Increase in taxes, insurance, etc. Annual differential decrease in costs and expenses b. Should the proposal be accepted? Yes or No