Differential Analysis for Machine Replacement Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $78,700, the accumulated depreciation is $31,500, its remaining useful life is five years, and its residual value is negligible. On May 4 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 $163,700. 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 present and proposed operatio
Differential Analysis for Machine Replacement
Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $78,700, the
| Present Operations | Proposed Operations | |||
| Sales | $249,500 | $249,500 | ||
| Direct materials | $85,000 | $85,000 | ||
| Direct labor | 59,000 | — | ||
| Power and maintenance | 5,500 | 29,100 | ||
| Taxes, insurance, etc. | 2,000 | 6,500 | ||
| Selling and administrative expenses | 59,000 | 59,000 | ||
| Total expenses | $210,500 | $179,600 |
a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.
| Differential Analysis | |||
| Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) | |||
| May 4 | |||
| Continue with Old Machine (Alternative 1) |
Replace Old Machine (Alternative 2) |
Differential Effect on Income (Alternative 2) |
|
| Revenues: | |||
| Sales (5 years) | $fill in the blank adefcdfdf01707a_1 | $fill in the blank adefcdfdf01707a_2 | $fill in the blank adefcdfdf01707a_3 |
| Costs: | |||
| Purchase price | fill in the blank adefcdfdf01707a_4 | fill in the blank adefcdfdf01707a_5 | fill in the blank adefcdfdf01707a_6 |
| Direct materials (5 years) | fill in the blank adefcdfdf01707a_7 | fill in the blank adefcdfdf01707a_8 | fill in the blank adefcdfdf01707a_9 |
| Direct labor (5 years) | fill in the blank adefcdfdf01707a_10 | fill in the blank adefcdfdf01707a_11 | fill in the blank adefcdfdf01707a_12 |
| Power and maintenance (5 years) | fill in the blank adefcdfdf01707a_13 | fill in the blank adefcdfdf01707a_14 | fill in the blank adefcdfdf01707a_15 |
| Taxes, insurance, etc. (5 years) | fill in the blank adefcdfdf01707a_16 | fill in the blank adefcdfdf01707a_17 | fill in the blank adefcdfdf01707a_18 |
| Selling and admin. expenses (5 years) | fill in the blank adefcdfdf01707a_19 | fill in the blank adefcdfdf01707a_20 | fill in the blank adefcdfdf01707a_21 |
| Income (Loss) | $fill in the blank adefcdfdf01707a_22 | $fill in the blank adefcdfdf01707a_23 | $fill in the blank adefcdfdf01707a_24 |
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.
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