Differential Analysis for Machine Replacement Proposal Franklin Printing Company

Question

Differential Analysis for Machine Replacement Proposal 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: Old Machine Cost of machine, ten-year life Annual depreciation (straight-line) Annual manufacturing costs, excluding depreciation Annual nonmanufacturing operating expenses Annual revenue Current estimated selling price of the machine $107,000 10,700 37,800 11,700 95,400 35,600 New Machine Cost of machine, six-year life Annual depreciation (straight-line) Estimated annual manufacturing costs, exclusive of depreciation Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine $135,600 22,600 17,900 Required: 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 six-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 (Alternative 2) Differential Effect on Income (Alternative 2) Revenues Proceeds from sale of old machine Costs Purchase price Annual manufacturing costs (6 yrs.) Income (Loss)

Explanation / Answer

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) 8-Nov Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine 0 35600 35600 Costs: Purchase price 0 -135600 -135600 Annual manufacturing costs (6 years) -226800 -107400 119400 Income (Loss) -226800 -207400 19400

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