Final answer:
A differential analysis for replacing a commercial oven revealed an annual maintenance cost reduction of $23,000 over 5 years, sale proceeds of $8,500, and a new oven cost of $110,000, resulting in a net differential decrease in cost of $13,500.
Step-by-step explanation:
To perform a differential analysis, we compare the costs and benefits associated with keeping the old oven versus replacing it with a new one. The key considerations include the annual maintenance cost savings, remaining life of the current oven, the sale proceeds of the old oven, and the cost of the new oven.
Annual maintenance cost reduction: By acquiring the new oven, the annual maintenance cost is reduced by $23,000. This reduction is applicable over 5 years, resulting in a total cost reduction of $23,000 x 5 = $115,000.
Proceeds from sale of equipment: Selling the old oven would generate a one-time cash inflow of $8,500.
Cost of new equipment: The new oven costs $110,000, which is a cash outflow at the time of purchase.
To compute the net differential decrease in cost from replacing equipment, we subtract the cost of the new oven and add the proceeds from the sale of the old oven to the total differential decrease in cost:
Total differential decrease in cost: $115,000
Proceeds from sale of old oven: +$8,500
Cost of new oven: -$110,000
The net differential decrease in cost from replacing the equipment is $115,000 + $8,500 - $110,000
= $13,500.