Differential Analysis Report for Machine Replacement White Noise Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $90,400, the accumulated depreciation is $32,200, its remaining useful life is five 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 $151,200. The automatic machine has an estimated useful life of five 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 Proposed Operations Operations Sales S254,900 $254.900 Direct materials S86,800 S86,800 Direct labor 60,300 20,100 Power and 5,600 9,600 maintenance Taxes, irisuralth, 2,000 6,700 Selling and administrative 60,300 60,300 expenses $215,000 $183,500 Total expenses 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 five years and the net annual differential change in costs anticipated. WHITE NOISE TECHNOLOGIES INC. Replace Machine Differential Analysis Report Annual costs and expenses-present machine $ Annual costs and expenses new machine $ Number of years applicable x $1 Cost of new machine $ Annual net differential decrease in costs and expenses-new machine b. Based only on the data presented, should the proposal be accepted? c. What are some of the other factors that should be considered before a final decision is made? 1. Do present and praposed operations provide the same capacity? 2. What are the opportunity costs associated with alternative uses of the $151,200 outlay required to purchase the automatic machine? 3. Is the product improved by using automatic machinery? 4. What is the book value of the manually operated machine that will be replaced? Select the relevant factor's) from the list above. Make-or-Buy Decision Wisconsin Arts of Milwaukee employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, and other publications for the production. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the layout work. The outside service is quoting a price of $a per layout page. The budget for the Publication Department is as follows: Salaries $184,000 Benefits 52,000 Supplies 33,000 Office expenses 24,000 Office depreciation 53,900 Computer 35.900 depreciation Total $382,800 The department expects to lay out 31,500 pages. The computers used by the department have an estimated residual value of $23,900. The Publication Department office space would be used for future administrative needs of the department's function were purchased from the outside. a. Prepare a differential analysis report for the make-or-buy decision, considering the differential revenues and costs. WISCONSIN ARTS OF MILWAUKEE Purchase Outside Page Layout Services Differential Analysis Report Differential revenue: Residual value of computer equipment $ Differential cost of alternatives: Purchase price of layout work: Number of pages Price per page Total differential costs Cost to perform internally: Salaries Benefits Supplies Office expenses b. Which costs are irrelevant to the Wisconsin Arts decision? 1. The residual value of the computers 2. The office depreciation 3. The computer depreciation 4. The service price to the outside company Select the irrelevant cost(s) frarn above choices. c. What additional considerations are relevant to the Wisconsin Arts decision? 1. The impact on employees 2. Potential customer dissatisfaction with the work done by the outside service 3. Loss of direct control over the quality and timing of the layout work The possibility that future layout rates could grow faster than the cast of Internal salaries Select the relevant consideration(s) from the list above
