Differential Analysis for a Lease or Sell Decision Burlington Construction Company is considering selling excess machinery with a book value of $276,200 (original cost of $398,000 less accumulated depreciation of $121,800) for $278,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $286,500 for five years, after which it is expected to have no residual value. During the period of the lease, Burlington Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $24,700. a. Prepare a differential analysis dated January 15 to determine whether Burlington Construction Company should lease (Alternative 1) or sell (Alternative 2) the machinery. If required, use a minus sign to indicate a loss. Differential Analysis Lease (Alt. 1) or Sell (Alt. 2) Machinery Revenues January 15 Lease Sell Machinery Machinery Differential Effects (Alternative 1) (Alternative 2) (Alternative 2) 286,500 $278,000 ✔ Costs Profit (Loss) Feedback ▼Check My Work Subtract the lease costs from the lease revenues. Subtract the sell machine costs from the sell machine revenue. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2. b. On the basis of the data presented, would it be advisable to lease or sell the machinery?
Differential Analysis for a Lease or Sell Decision Burlington Construction Company is considering selling excess machinery with a book value of $276,200 (original cost of $398,000 less accumulated depreciation of $121,800) for $278,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $286,500 for five years, after which it is expected to have no residual value. During the period of the lease, Burlington Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $24,700. a. Prepare a differential analysis dated January 15 to determine whether Burlington Construction Company should lease (Alternative 1) or sell (Alternative 2) the machinery. If required, use a minus sign to indicate a loss. Differential Analysis Lease (Alt. 1) or Sell (Alt. 2) Machinery Revenues January 15 Lease Sell Machinery Machinery Differential Effects (Alternative 1) (Alternative 2) (Alternative 2) 286,500 $278,000 ✔ Costs Profit (Loss) Feedback ▼Check My Work Subtract the lease costs from the lease revenues. Subtract the sell machine costs from the sell machine revenue. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2. b. On the basis of the data presented, would it be advisable to lease or sell the machinery?
Chapter1: Making Economics Decisions
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Transcribed Image Text:Differential Analysis for a Lease or Sell Decision
Burlington Construction Company is considering selling excess machinery with a book value of $276,200 (original cost of $398,000 less accumulated depreciation of $121,800) for $278,000, less a 5% brokerage
commission. Alternatively, the machinery can be leased for a total of $286,500 for five years, after which it is expected to have no residual value. During the period of the lease, Burlington Construction Company's
costs of repairs, insurance, and property tax expenses are expected to be $24,700.
a. Prepare a differential analysis dated January 15 to determine whether Burlington Construction Company should lease (Alternative 1) or sell (Alternative 2) the machinery. If required, use a minus sign to indicate a
loss.
Differential Analysis
Lease (Alt. 1) or Sell (Alt. 2) Machinery
Revenues
January 15
Lease
Sell
Machinery
Machinery
Differential
Effects
(Alternative 1) (Alternative 2) (Alternative 2)
286,500 $278,000 ✔
Costs
Profit (Loss)
Feedback
▼Check My Work
Subtract the lease costs from the lease revenues. Subtract the sell machine costs from the sell machine revenue. Determine the differential effect on income of the revenues, costs, and income (loss) by
subtracting alternative 1 from alternative 2.
b. On the basis of the data presented, would it be advisable to lease or sell the machinery?
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