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Differential Analysis for 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 5 years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $180,000. The automatic machine has an estimated useful life of 5 years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

	Present Operations		Proposed Operations
Sales	$205,000		$205,000
Direct materials	$72,000		$72,000
Direct labor	51,000
Power and maintenance	5,000		18,000
Taxes, insurance, etc.	1,500		4,000
Selling and administrative expenses	45,000		45,000
Total expenses	$174,500		$139,000

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a. Prepare a differential analysis dated May 4 to determine whether to Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Sales (5 years)	$fill in the blank 64e8b70db00cfb1_1	$fill in the blank 64e8b70db00cfb1_2	$fill in the blank 64e8b70db00cfb1_3
Costs:
Purchase price	fill in the blank 64e8b70db00cfb1_4	fill in the blank 64e8b70db00cfb1_5	fill in the blank 64e8b70db00cfb1_6
Direct materials (5 years)	fill in the blank 64e8b70db00cfb1_7	fill in the blank 64e8b70db00cfb1_8	fill in the blank 64e8b70db00cfb1_9
Direct labor (5 years)	fill in the blank 64e8b70db00cfb1_10	fill in the blank 64e8b70db00cfb1_11	fill in the blank 64e8b70db00cfb1_12
Power and maintenance (5 years)	fill in the blank 64e8b70db00cfb1_13	fill in the blank 64e8b70db00cfb1_14	fill in the blank 64e8b70db00cfb1_15
Taxes, insurance, etc. (5 years)	fill in the blank 64e8b70db00cfb1_16	fill in the blank 64e8b70db00cfb1_17	fill in the blank 64e8b70db00cfb1_18
Selling and admin. expenses (5 years)	fill in the blank 64e8b70db00cfb1_19	fill in the blank 64e8b70db00cfb1_20	fill in the blank 64e8b70db00cfb1_21
Profit (loss)	$fill in the blank 64e8b70db00cfb1_22	$fill in the blank 64e8b70db00cfb1_23	$fill in the blank 64e8b70db00cfb1_24

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b. Based only on the data presented, should the proposal be accepted?

Should be acceptedShould not be accepted

c. Differences in capacity between the two alternatives is

relevantnot relevant

to consider before a final decision is made.