Question

Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,400, the accumulated depreciation is $24,200, its remaining useful life is five years, and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $113,800. 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 current and proposed operations: Current Operations Proposed OperationsSales $191,500 $191,500 Direct materials $65,200 $65,200 Direct labor 45,300 15,100 Power and maintenance 4,200 7,200 Taxes, insurance, etc. 1,500 5,000 Selling and administrative expenses 45,300 45,300 Total expenses $161,500 $137,800Required:Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs anticipated.

Answer 1

Differential analysis for 1 year

Keep old Change Differential

machine machine amount

sales revenue 191,000 191,000 0

depreciation expense -4,840 -22,760 -17,920

per year

direct materials -65,200 -65,200 0

direct labor -45,300 -15,100 30,200

power and -4,200 -7,200 -3,000

maintenance

taxes and -1,500 -5,000 -3,500

insurance

S&A expenses -45,300 -45,300 0

total 24,660 30,440 5,780

If the new machine is purchased, profits will increase by $5,780 every year.

Differential analysis for 5 years

Keep old Change Differential

machine machine amount

sales revenue 955,000 955,000 0

depreciation expense -24,200 -113,800 -89,600

per year

direct materials -326,000 -326,000 0

direct labor -226,500 -75,500 151,000

power and -21,000 -36,000 -15,000

maintenance

taxes and -7,500 -25,000 -17,500

insurance

S&A expenses -226,500 -226,500 0

total 123,300 152,200 28,900

If the new machine is purchased, profits will increase by $28,900 for the 5 year period.