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 $54,600, the accumulated depreciation is $21,800, 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 $113,600. 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?
________ (should be accepted or should not be accepted)

c. Differences in capacity between the two alternatives is ____ (relevant or not relevant) to consider before a final decision is made.

Present Operations Proposed Operations Sales $173,100 $173,100 Direct materials $59,000 $59,000 Direct labor 41,000 — Power and maintenance 3,800 20,200 Taxes, insurance, etc. 1,400 4,500 Selling and administrative expenses 41,000 41,000 Total expenses $146,200 $124,700

Explanation / Answer

If any doubt please comment

Ans 1 (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Sales (5 years) 865500 865500 0 (173100*5) (173100*5) Costs: Purchase price 0 113600 -113600 Direct materials (5 years) 295000 295000 0 (59000*5) (59000*5) Direct labor (5 years) 205000 205000 (41000*5) Power and maintenance (5 years) 19000 101000 -82000 (3800*5) (20200*5) Taxes, insurance, etc. (5 years) 7000 22500 -15500 (1400*5) (4500*5) Selling and admin. expenses (5 years) 205000 205000 0 (41000*5) (41000*5) Income (Loss) 134500 128400 6100 b) Yes the proposal must be accepted as there is increase in income by $6100 c) Is relevant

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