Answered: Differential Analysis for a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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1. Differential Analysis for a Lease-or-Sell Decision

Inman Construction Company is considering selling excess machinery with a book value of $279,300 (original cost of $399,200 less accumulated depreciation of $119,900) for $276,600, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $283,600 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,100.

2. Differential Analysis for a Discontinued Product

A condensed income statement by product line for Crown Beverage Inc. indicated the following for King Cola for the past year:

Sales	$234,500
Cost of goods sold	112,000
Gross profit	$122,500
Operating expenses	143,000
Loss from operations	$(20,500)

It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 18% of the operating expenses are fixed. Since King Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

Differential Analysis for a Lease-or-Sell Decision
Inman Construction Company is considering selling excess machinery with a book value of $279,300 (original cost of $399,200 less accumulated depreciation of
$119,900) for $276,600, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $283,600 for five years,
after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax
expenses are expected to be $25,100.
a. Prepare a differential analysis, dated May 25 to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in
which you must enter subtracted or negative numbers use a minus sign.
Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
May 25
Differential Effect
Lease Machinery
Sell Machinery
on Income
(Alternative 1)
(Alternative 2)
(Alternative 2)
Revenues
Costs
Income (Loss)
b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.
The net
from selling is $

a. Prepare a differential analysis, dated March 3, to determine whether King Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount
is zero, enter zero "0". Use a minus sign to indicate a loss.
Differential Analysis
Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2)
January 21
Differential Effect
Continue King
Discontinue King
on Income
Cola (Alternative 1) Cola (Alternative 2)
(Alternative 2)
Revenues
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)
$
b.
Should Star Cola be retained? Explain.
As indicated by the differential analysis in part (A), the income would
by $
if the product is discontinued.

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