Flint Tooling Company is considering replacing a machine that has been used in i
ID: 2360991 • Letter: F
Question
Flint Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows: Old Machine Cost of machine, eight-year life $48,000 Annual depreciation (straight-line) 6,000 Annual manufacturing costs, excluding depreciation 14,500 Annual nonmanufacturing operating expenses 2,900 Annual revenue 29,600 Current estimated selling price of the machine 18,000 New Machine Cost of machine, six-year life $58,500 Annual depreciation (straight-line) 9,750 Estimated annual manufacturing costs, 5,200 exclusive of depreciation Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine. 1. Prepare a differential analysis report as of May 22, 2010, comparing operations utilizing the new machine with operations using the present equipment. The analysis should indicate the differential income that would result over the six-year period if the new machine is acquired. 2. List other factors that should be considered before a final decision is reached.Explanation / Answer
1.
DIFFERENTIAL ANALYSIS REPORT Proposal to Replace Machine May 22, 2010 Annual manufacturing costs associated with present machine $ 14,500 Annual manufacturing costs associated with proposed new machine 5,200 Annual reduction in manufacturing costs $ 9,300 Number of years applicable x 6 Cost reduction attributable to difference in manufacturing costs $ 55,800 Proceeds from sale of present machine 18,000 $ 73,800 Cost of new machine 58,500 Differential income anticipated from replacement, 6-year total $ 15,300 2. Flint Tooling Company must consider the following other factors before taking a final dcision : a) Whether the lower annual operating costs of the new machine would enable the company to meet the future inflationary costs b) Whether the new machine decreases the use of energy, if so , then the increase in these costs in future makes the new machine more attractive c) Potential technological advances in the machine over the next few years should be considered d) Whether the manufacturer of new machine is reliable in terms of providing maintenance to the machine both as to its service and cost. e) Whether the new machine requires additional space than the existing one which will increase the space rental cost.Related Questions
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