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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 $55,400, the accumulated depreciation is $22,200, its remaining useful life is five 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 $115,200. 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 present and proposed operations: Present Operations $175,600 Proposed Operations $175,600 Sales Direct materials $59,800 $59,800 Direct labor 41,600 3,900 Power and maintenance 20,500 Taxes, insurance, etc. 1,400 4,600 41,600 41,600 Selling and administrative expenses Total expenses 5148,300 $126,500 a. Prepare a differential analysis dated May 4, 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 "o". Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) May 4 Continue with Old Machine Replace Old Machine Differential Effect on Income (Alternative 1) (Alternative 2) 2 (Alternative 2) 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) Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $601,800 and has $353,000 of accumulated depreciation date, with a new machine that has a purchase price of $484,200. The old machine could be sold for $62,200. The annual variable production costs associated with the old machine are estimated to be $156,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $98,700 per year for eight years. a.1 Prepare a differential analysis dated September 13, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) September 13 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine Costs: Purchase price Variable productions costs (8 years) Income (Loss) a.2 Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Continue with the old machine b. What is the sunk cost in this situation? The sunk cost is the s
