A machine with a book value of $247,000 has an estimated six-year life. A propos

ID: 2398753 • Letter: A

Question

A machine with a book value of $247,000 has an estimated six-year life. A proposal is offered to sell the old machine for $214,300 and replace it with a new machine at a cost of $282,400. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $49,500 to $39,600.

a. Prepare a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter "0". Use a minus sign to indicate subtracted or negative numbers or a loss.

b. Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?
Continue with the old machine

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) April 11 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 Direct labor (6 years) Income (Loss) $ $ $

Explanation / Answer

Continue with Old Machine (Alternative 1)

Replace Old Machine (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues:

Proceeds from sale of old machine

214300

Costs:

Purchase price

282400

(282400)

Direct labor (6 years)

(49500 * 6)

=(297000)

(39600 * 6)

=(237600)

59400

Income (Loss)

(297000)

(305700)

(8700)

(b) The company should continue with the old machine