Differential Analysisfor Machine Replacement

Kim Kwon 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 May 4, 2014, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $180,000. 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 present and proposed operations:

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a. Prepare a differential analysis dated May 4, 2014, to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter zero "0".

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 4, 2014
Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Sales (5 years)	$	$	$
Costs:
Purchase price
Direct materials (5 years)
Direct labor (5 years)
Power and maintenance (5 years)
Taxes, insurance, etc. (5 years)
Selling and admin. expenses (5 years)
Income (Loss)	$	$	$

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a. FollowExample Exercise 24-4. For the continue and replace alternatives subtract the costs from the revenues. Multiply the sales and costs for the five year life. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

Learning Objective 1.

b. Based only on the data presented, should the proposal be accepted? SelectShould be acceptedShould not be acceptedCorrect 1 of Item 2

c. Differences in capacity between the two alternatives isSelectrelevantnot relevantCorrect 2 of Item 2to consider before a final decision is made.

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b. Which alternative has the most desirable effect on income?

c. What is the effect of each alternative on the capacity, the opportunity costs, and taxes?