Replace Equipment A machine with a book value of $249,500 has an estimated six-y
ID: 2538548 • Letter: R
Question
Replace Equipment A machine with a book value of $249,500 has an estimated six-year life. A proposal is offered to sell the old machine for $217,900 and replace it with a new machine at a cost of $282,900. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,600 to $40,500 Prepare a differential analysis dated October 3 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter zero "O. 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) October 3 Continue with Old Machine (Alternative 1) (Alternative 2) Replace Old Machine Differential Effect on Income (Alternative 2) Revenues Proceeds from sale of old machine Costs: Purchase price Direct labor (6 years) Income (Loss) Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?Explanation / Answer
Answer:
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) October 3
Continue with Old Machine
Replace Old Machine
Differential Effect
(Alternative 1)
(Alternative 2)
on Income (Alternative 2)
Revenues
Proceeds from sale of old machine
$0
$217,900
$217,900
Costs
Purchase price
$0
($282,900)
($282,900)
Annual manufacturing costs (6 yrs.)
($303,600)
($243,000)
$60,600
Income (Loss)
($303,600)
($308,000)
($4,400)
The company should continue old machine
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Working notes for the above answer is as under
Working note 1
Annual manufacturing costs (6 yrs.) for Old Machine
=50600x6 year
=$303,600
Working note 2
Annual manufacturing costs (6 yrs.) for New Machine
=40500 x 6 year
=$308,000
Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) October 3
Continue with Old Machine
Replace Old Machine
Differential Effect
(Alternative 1)
(Alternative 2)
on Income (Alternative 2)
Revenues
Proceeds from sale of old machine
$0
$217,900
$217,900
Costs
Purchase price
$0
($282,900)
($282,900)
Annual manufacturing costs (6 yrs.)
($303,600)
($243,000)
$60,600
Income (Loss)
($303,600)
($308,000)
($4,400)