Answered: Differential Analysis for Machine…

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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Differential Analysis for Machine Replacement Proposal

Franklin Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Old Machine
Cost of machine, ten-year life	$107,400
Annual depreciation (straight-line)	10,740
Annual manufacturing costs, excluding depreciation	38,500
Annual nonmanufacturing operating expenses	12,000
Annual revenue	94,000
Current estimated selling price of the machine	35,700

New Machine
Cost of machine, six-year life	$135,600
Annual depreciation (straight-line)	22,600
Estimated annual manufacturing costs, exclusive of depreciation	17,700

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

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1. Prepare a differential analysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the differential profit that would result over the six-year period if the new machine is acquired. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential AnalysisContinue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)November 8

	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues
Proceeds from sale of old machine	$fill in the blank e26372f68fbbf84_1	$fill in the blank e26372f68fbbf84_2	$fill in the blank e26372f68fbbf84_3
Costs
Purchase price	fill in the blank e26372f68fbbf84_4	fill in the blank e26372f68fbbf84_5	fill in the blank e26372f68fbbf84_6
Annual manufacturing costs (6 yrs.)	fill in the blank e26372f68fbbf84_7	fill in the blank e26372f68fbbf84_8	fill in the blank e26372f68fbbf84_9
Profit (loss)	$fill in the blank e26372f68fbbf84_10	$fill in the blank e26372f68fbbf84_11	$fill in the blank e26372f68fbbf84_12

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2. What other factors should be considered before a final decision is reached?

Are there any improvements in the quality of work turned out by the new machine?
What opportunities are available for the use of the funds required to purchase the new machine?
Are there any improvements in the quality of work turned out by the new machine and what opportunities are available for the use of the funds required to purchase the new machine?
What affect would this decision have on employee morale?
None of these choices are correct.

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