Differential Analysis Report for Machine Replacement Lone Wolf Technologies Inc.

Question

Differential Analysis Report for Machine Replacement

Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,400, the accumulated depreciation is $24,200, its remaining useful life is five years, and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $113,800. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on current and proposed operations:

a. Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs anticipated.

Annual costs and expenses—new machine

Annual differential decrease in costs and expenses

Number of years applicable

Total differential decrease in costs and expenses

Cost of new machine

Net differential decrease in costs and expenses, five-year total

Annual net differential decrease in costs and expenses—new machine

Explanation / Answer

Annual costs and expenses—present machine 161500 Annual costs and expenses—new machine 137800 Annual differential decrease in costs and expenses 23700 Number of years applicable 5 Total differential decrease in costs and expenses, five-year total 118500 Cost of new machine 113800 Net differential decrease in costs and expenses, five-year total 4700 the machine should be replaced

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