Question

A machine with a book value of $250,400 has an estimated six-year life. A proposal is offered to sell the old machine for $215,300 and replace it with a new machine at a cost of $283,100. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,900 to $40,700.

Required:
a. Prepare a differential analysis dated February 18 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).
b. Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)?

Answer 1

A.Continue with Old Machine (Alt. 1) $305,400

Replace Old Machine (Alt. 2) $312,000

Differential effect on net income (Alt. 2) $6,600

B. Continue with the old machine (Alternative 1

Step-by-step explanation:

a. Preparation of a differential analysis dated February 18 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

DIFFERENTIAL ANALYSIS

Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) February 18

Continue with Old Machine (Alt. 1) Replace Old Machine (Alt. 2) Differential effect on net income (Alt. 2)

Revenues:

Proceeds from sale of old machine $0 $215,300 $215,300

Costs:

Purchase price $0 –$283,100 –$283,100

Direct labor (6 years) –$305,400 -$244,200 $61,200

($50,900*6years=$305,400)

($40,700*6years=$244,200)

Income (Loss) –$305,400 –$312,000 –$6,600

B. Based on the above differential analysis

The company should continue with the old machine (Alternative 1) .