Innovative Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $74,200, the accumulated depreciation is $29,700, 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 $139,700. 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:

Line Item Description	Current Operations	Proposed Operations
Sales	$235,200	$235,200
Direct materials	$80,100	$80,100
Direct labor	55,700	18,600
Power and maintenance	5,200	8,900
Taxes, insurance, etc.	1,900	6,200
Selling and administrative expenses	55,700	55,700
Total expenses	$198,600	$169,500

 

Question Content Area

 

a.  create 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.

Line Item Description	Amount
Annual costs and expenses—present machine	$Annual costs and expenses—present machine
Annual costs and expenses—new machine	Annual costs and expenses—new machine
Annual differential decrease in costs and expensesAnnual differential increase in costs and expenses	$- Select -
Number of years applicable	× Number of years applicable
Total differential decrease in costs and expensesTotal differential increase in costs and expenses	$- Select -
Cost of new machine	Cost of new machine
Net differential decrease in costs and expenses, five-year totalNet differential increase in costs and expenses, five-year total	$- Select -
Annual net differential decrease in costs and expenses—new machine	$Annual net differential decrease in costs and expenses—new machine

 

Question Content Area

 

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

YesNo

 

c.   What are some of the other factors that should be considered before a final decision is made?

1. Do present and proposed operations provide the same capacity?
2. What are the opportunity costs associated with alternative uses of the $139,700 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.
 

1 only1, 2, and 3 only2 and 3 only3 and 4 only1, 2, 3, and 4