A). Inman Construction Company is considering selling excess machinery with a bo

Question

A).

Inman Construction Company is considering selling excess machinery with a book value of $281,700 (original cost of $401,500 less accumulated depreciation of $119,800) for $275,200, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $285,400 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $26,500.

Prepare a differential analysis, dated May 25, to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.

The net from selling is $

B). A condensed income statement by product line for Crown Beverage Inc. indicated the following for King Cola for the past year:

It is estimated that 13% of the cost of goods sold represents fixed factory overhead costs and that 22% of the operating expenses are fixed. Since King Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

Prepare a differential analysis, dated March 3, to determine whether King Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would by $ if the product is discontinued.

C). Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $61 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 38% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

If Companion Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 12% of the direct labor costs.

Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) May 25 Lease Machinery
(Alternative 1) Sell Machinery
(Alternative 2) Differential Effect
on Income
(Alternative 2) Revenues $ $ $ Costs Income (Loss) $ $ $

Explanation / Answer

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a. Lease Sell Differential Revenue 285400 275200 -10200 Costs 5% of 275200 -26500 -13760 12740 Income (Loss) 258900 261440 2540 Sell the machinery since it is givine $2540 more income than that of lease. b. Continue Discontinue Differential Revenue 235500 0 -235500 Costs: Variable cost of goods sold 112000*87% 97440 0 -97440 Variable operating expense 146000*78% 113880 0 -113880 Fixed cost 46680 46680 0 Income (Loss) -22500 -46680 -24180 Should not discontinue as loss is more than the loss if we continue c. Make Buy Differential Sales Price Cost: Purchase Price 61 61 Direct Matrial per unit 27 -27 Direct Labor per unit 16 -16 Variable OVH per unit 12%*16 1.92 -1.92 Fixed OVH Per unit 6.08 6.08 0 Income (Loss) -51 -67.08 -16.08 Should Make as cost is lesser by 16.08 than buy.

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