Differential Analysis for Machine Replacement Ridgeway Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $200,000, the accumulated depreciation is $50,000, its remaining useful life is 6 years, and its residual value is negligible. On October 1 of the current year, a proposal wa made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $500,000. The automatic machine has an estimated useful life of 6 years and no significant residual value. For use in evaluating the proposal, the managerial accountant accumulated the following annual data on present and proposed operations: Sales Direct materials Direct labor Sen me Power and maintenance Taxes, insurance, etc. Selling and administrative expenses Total expenses Revenues: a. Prepare a differential analysis dated October 1 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Continue with (Alt. 1) or Replace (Alt. 2) Old Machine October 1 Continue with Replace Old Machine Differential Effects Old Machine (Alternative 2) (Alternative 2) Line Item Description (Alternative 1) AT Direct materials (6 years) Direct labor (6 years) Power and maintenance (6 years) Taxes, insurance, etc. (6 years) Selling and admin, expenses (6 years) Sales (6 years) Costs: Purchase price Present Proposed Operations Operations $400,000 $400,000 $120,000 $120,000 90,000 9,000 26,000 1,000 4,000 50,000 50,000 $200,000 Profit (los) $270,000 b. Based only on the data presented, should the proposal be accepted? c. Differences in capacity between the two alternatives is to consider before a final decision is made.
Differential Analysis for Machine Replacement Ridgeway Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $200,000, the accumulated depreciation is $50,000, its remaining useful life is 6 years, and its residual value is negligible. On October 1 of the current year, a proposal wa made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $500,000. The automatic machine has an estimated useful life of 6 years and no significant residual value. For use in evaluating the proposal, the managerial accountant accumulated the following annual data on present and proposed operations: Sales Direct materials Direct labor Sen me Power and maintenance Taxes, insurance, etc. Selling and administrative expenses Total expenses Revenues: a. Prepare a differential analysis dated October 1 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Continue with (Alt. 1) or Replace (Alt. 2) Old Machine October 1 Continue with Replace Old Machine Differential Effects Old Machine (Alternative 2) (Alternative 2) Line Item Description (Alternative 1) AT Direct materials (6 years) Direct labor (6 years) Power and maintenance (6 years) Taxes, insurance, etc. (6 years) Selling and admin, expenses (6 years) Sales (6 years) Costs: Purchase price Present Proposed Operations Operations $400,000 $400,000 $120,000 $120,000 90,000 9,000 26,000 1,000 4,000 50,000 50,000 $200,000 Profit (los) $270,000 b. Based only on the data presented, should the proposal be accepted? c. Differences in capacity between the two alternatives is to consider before a final decision is made.
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:Differential Analysis for Machine Replacement
Ridgeway Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $200,000, the accumulated depreciation is $50,000, its remaining useful life is 6 years, and its residual value is negligible. On October 1 of the current year, a proposal was
made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $500,000. The automatic machine has an estimated useful life of 6 years and no significant residual value. For use in evaluating the proposal, the managerial accountant accumulated the following annual data on present and
proposed operations:
Sales
Direct materials
Direct labor
Power and maintenance
Taxes, insurance, etc.
Selling and administrative expenses
Total expenses
a. Prepare a differential analysis dated October 1 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.
Differential Analysis
Continue with (Alt. 1) or Replace (Alt. 2) Old Machine
October 1
Continue with
Old Machine
(Alternative 1)
Line Item Description
Revenues:
Sales (6 years)
Costs:
Present Proposed
Operations Operations
$400,000 $400,000
$120,000 $120,000
90,000
9,000
1,000
50,000
$270,000
Purchase price
Direct materials (6 years)
Direct labor (6 years)
Power and maintenance (6 years)
Taxes, insurance, etc. (6 years)
Selling and admin. expenses (6 years)
Profit (loss)
26,000
4,000
50,000
$200,000
c. Differences in capacity between the two alternatives is
Replace Old Machine
(Alternative 2)
b. Based only on the data presented, should the proposal be accepted?
Differential Effects
(Alternative 2)
to consider before a final decision is made.
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