Differential Analysis for a Lease or Sell Decision Sure-Bilt Construction Compan

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Differential Analysis for a Lease or Sell Decision

Sure-Bilt Construction Company is considering selling excess machinery with a book value of $278,000 (original cost of $400,000 less accumulated depreciation of $122,000) for $277,500, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $285,600 for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,100.

a. Prepare a differential analysis, dated January 3, 2014, to determine whether Sure-Bilt should lease (Alternative 1) or sell (Alternative 2) the machinery.

Differential Analysis

Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)

January 3, 2014

Lease Machinery (Alternative 1)

Sell Machinery (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$  

$  

$  

Costs

  

  

  

Income (Loss)

$  

$  

$  

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

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a. Prepare a differential analysis, dated January 3, 2014, to determine whether Sure-Bilt should lease (Alternative 1) or sell (Alternative 2) the machinery.

Differential Analysis

Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)

January 3, 2014

Lease Machinery (Alternative 1)

Sell Machinery (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$  

$  

$  

Costs

  

  

  

Income (Loss)

$  

$  

$  

Explanation / Answer

Answer:

A

Differential Analysis

Lease Machinery

Sell Machinery

Differential (sell-lease)

Revenue

285600

277500

-8100

Less: Expanses

Repairs, insurance, and property tax in lease

-25100

-13875

11225

Brokerage commission in sell (5%x277500)

0

.

260500

263625

3125

___________________________________

b)

The company should sell the machine as there is a incremental income of $ 3125 on leasing

Lease Machinery

Sell Machinery

Differential (sell-lease)

Revenue

285600

277500

-8100

Less: Expanses

Repairs, insurance, and property tax in lease

-25100

-13875

11225

Brokerage commission in sell (5%x277500)

0

.

260500

263625

3125

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