Differential Analysis for Machine Replacement Kim Kwon Digital Components Compan

Question

Differential Analysis for Machine Replacement

Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $67,700, the accumulated depreciation is $27,100, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $140,800. 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 present and proposed operations:

a. Prepare a differential analysis dated May 4, to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter zero "0".

b. Based only on the data presented, should the proposal be accepted?

c. Differences in capacity between the two alternatives is to consider before a final decision is made.

Present Operations Proposed Operations Sales $214,600 $214,600 Direct materials $73,100 $73,100 Direct labor 50,800 — Power and maintenance 4,700 25,000 Taxes, insurance, etc. 1,700 5,600 Selling and administrative expenses 50,800 50,800 Total expenses $181,100 $154,500

Explanation / Answer

a.

b. No.

The proposal should not be accepted as it will result in reduction of income by $7800 over the 5 years.

c. Differences in capacity between the two alternatives is necessary to consider before a final decision is made.

Note: Kindly check c. prior to submission as it seems incomplete.

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) May 4 Continue with Old Machine
(Alternative 1) Replace Old Machine
(Alternative 1) Differential Effect on Income
(Alternative 2) Revenues: Sales (5 years) 1073000 1073000 0 Costs: Purchase price 0 140800 -140800 Direct materials (5 years) 365500 365500 0 Direct labor (5 years) 254000 0 254000 Power and maintenance (5 years) 23500 125000 -101500 Taxes, insurance, etc. (5 years) 8500 28000 -19500 Selling and admin. Expenses (5 years) 254000 254000 0 Income (Loss) 167500 159700 -7800

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