Franklin Printing Company is considering replacing a machine that has been used

Question

Franklin Printing Company is considering replacing a machine that has been used in its factory for four 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:

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Old Machine Cost of machine, ten-year life $108,200 Annual depreciation (straight-line) 10,820 Annual manufacturing costs, excluding depreciation 39,300 Annual nonmanufacturing operating expenses 12,500 Annual revenue 95,500 Current estimated selling price of the machine 36,500 New Machine Cost of machine, six-year life $136,200 Annual depreciation (straight-line) 22,700 Estimated annual manufacturing costs, exclusive of depreciation 17,800 1. Prepare a differential analysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential Income that would result over the slx-year period If the new machine is acquired. If an amount is zero, enter "o", Use a minus sign to Indicate subtracted amounts, negative amounts, or a loss. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine(Alt. 2) November 8 Continue with Old Machine (Alternative 1) Replace Old Machine (Altematve 2) Differential Effect on Income (Alternative 2) Revenues Proceeds from sale of old machine Purchase price Annual manufacturing costs (6 yrs.) Income (Loss) 2. What other factors should be considered before a final decision is reached? a. Are there any improvements in the quality of work turned out by the new machine? b. What opportunitiles are available for the use of the funds required to purchase the new machine? c. Are there any improvements in the quality of work turned out by the new machine and what opportunities are available for the use of the funds required to purchase the new machine? d. What affect would this decision have on employee morale? e. None of these choices are correct.

Explanation / Answer

Particulars Continue with old machine Replace old machine Differential effect on Income Revenue Proceeds from sale machine                                                     -                                        36,500                                    -36,500 Costs Purchase price                                                     -                                     1,36,200                                 -1,36,200 Annual manfacturing costs -6 years                                        2,35,800                                   1,06,800                                  1,29,000 Income                                       -2,35,800                                 -2,06,500                                    -29,300 Alternative 2 i.e. replacing old machine is to be selected Other Factors to be conisdered: C&D factors to be considered i.e. improvement in quality of work , opportunity cost of investment & employee morale

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