Franklin Printing Company is considering replacing a machine that has been used

Question

Franklin Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Required:

1. Prepare a differential analysis as of February 28, 2014, comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. If an amount is zero, enter zero "0".

Differential Analysis

Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)

February 28, 2014

Continue with Old Machine (Alternative 1)

Replace Old Machine (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

Proceeds from sale of old machine

$  

$  

$  

Costs

Purchase price

  

  

  

Annual manufacturing costs (6 yrs.)

  

  

  

Income (Loss)

$  

$  

$  

2. What other factors should be considered before a final decision is reached?

Are there any improvements in the quality of work turned out by the new machine?

What opportunities are available for the use of the funds required to purchase the new machine?

Are there any improvements in the quality of work turned out by the new machine and what opportunities are available for the use of the funds required to purchase the new machine?

What affect would this decision have on employee morale?

None of these choices is correct.

Old Machine Cost of machine, 10-year life $107,100 Annual depreciation (straight-line) 10,710 Annual manufacturing costs, excluding depreciation 37,600 Annual nonmanufacturing operating expenses 11,500 Annual revenue 94,200 Current estimated selling price of the machine 36,700 New Machine Cost of machine, six-year life $136,200 Annual depreciation (straight-line) 22,700 Estimated annual manufacturing costs, exclusive of depreciation 18,900

Explanation / Answer

Answer: Other factors that should be considered are quality of the machines, adaption to the new technology and competitor and product analysis.

Answer: Yes: new machinery can bring in more simplicity in the usage reducing the time of operation and would keep the morale of the workers high

Ans: Fund can be used for the product improvement and old machine modification for cost reduction too.

Answer: Making old machinery modified for the best use of workers would increase the work environment efficiency and safety.

Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) February 28, 2014 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues 565200 565200 0 Proceeds from sale of old machine 36700 $   0 $   36700 $   Costs Purchase price 107100    136200    -29100    Annual manufacturing costs (6 yrs.) 225600    113400    112200    Income (Loss) 269200 $   315600 $   -46400 $   Differential analysis shows there is a loss of $46400 from the new machinery. So the new machinery purchase should be abondoned.

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