8.Claxon Company owns a machine with a cost of $301,000 and accumulated deprecia

Question

8.Claxon Company owns a machine with a cost of $301,000 and accumulated depreciation of $64,430 that can be sold for $266,900, less a 4% sales commission. Alternatively, the machine can be leased by Claxon Company for three years for a total of $277,610, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Claxon Company on the machine would total $19,286 over the three years.

The area of accounting concerned with the effect of alternative courses of action on revenues and costs.

Differential Analysis

Lease (Alternative 1) or Sell (Alternative 2) Machine

January 12

1

Lease Machine

Sell Machine

Differential Effect on Income

2

(Alternative 1)

(Alternative 2)

(Alternative 2)

3

4

5

Should Claxon Company lease (Alternative 1) or sell (Alternative 2) the machine?

Sell the machine

Lease the machine

The company is indifferent since the result is the same regardless of which alternative is chosen.

Required: 1. Prepare a differential analysis

The area of accounting concerned with the effect of alternative courses of action on revenues and costs.

on January 12 as to whether Claxon Company should lease (Alternative 1) or sell (Alternative 2) the machine. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter “0”. A colon (:) will automatically appear if required. 2. Should Claxon Company lease (Alternative 1) or sell (Alternative 2) the machine?

Explanation / Answer

DIFFERENTIAL ANALYSIS LEASE(ALTERNATIVE-1) OR SELL MACHINE (ALTERNATIVE-2) ALTERNATIVE-1 ALTERNATIVE-2 DIFFERENTIAL EFFECT ON INCOME Lease rentals 277610 277610 Sale value of machine less 4% commission' 256224 -256224 (266900-4% of 266900) Repair, Insurance and property tax paid -19286 -19286 Net cash inflow 258324 256224 2100 Claxon Company should take the decision: Lease the machinery as it would lead to increase in inflow by $2100

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