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

Question

Differential Analysis for a Lease or Sell Decision

Sure-Bilt Construction Company is considering selling excess machinery with a book value of $278,100 (original cost of $398,800 less accumulated depreciation of $120,700) for $276,100, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $284,000 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 $25,500.

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

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)

$  

$  

$  

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

Solution :

Particulars

Lease Machinery (Alternative 1)

Sell Machinery (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$284,000

$276,100

($7,900)

Costs (Repair & Insurance in lease option, brokerage in sell option)

$25,500

$13,805

$11,695

Income / (Loss)

$258,500

$262,295

$3,795

Hence Sure Built should adopt alternative 2 and sell the machinery.

Particulars

Lease Machinery (Alternative 1)

Sell Machinery (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$284,000

$276,100

($7,900)

Costs (Repair & Insurance in lease option, brokerage in sell option)

$25,500

$13,805

$11,695

Income / (Loss)

$258,500

$262,295

$3,795

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