Flint Tooling Company is considering replacing a machine that has been used in its factory for two 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 MachineCost of machine, eight year life$40,000Annual depreciation (straight line)5,000Annual manufacturing costs, excluding depreciation12,400Annual nonmanufacturing operating expenses2,900Annual revenue35,400Current estimated selling price of the machine13,900 New MachineCost of machines, six year life$59,000Annual depreciation (straight line)9,500Estimated annual manufacturing cost, less depreciation3,900 Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.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 income that would result over the six-year period if the new machine is acquired. List other factors that should be considered before a final decision is reached.

Replacement Decisions are concerned with taking a decision as to a particular asset should be replaced with a new asset or the old one already in use should be continued with. This decision is taken by considering the revenues and costs of both the assets and choose the one with more benefits.1. Differential Analysis Statement Continue with Old Machine Replace Old Machine Differential Effect Proceeds From Sale Of Old Machine $13,900.00 $13,900.00 Annual Manufacturing Costs, Excluding Depreciation $74,400.00 $23,400.00 $51,000.00 (12400*6) (3900*6) Less: Purchase Price of New Machine -$59,000.00 -$59,000.00 Net Differential Effect on net Income by replacing machine (74,400 ) (68,500) $5,900.00 Note: Annual non-manufacturing operating expenses and revenue are not shown in the Differential Analysis Statement because they will not be affected by the purchase of new machine and Depreciation has not been added because it is a non cash expense.2. Factors to consider before reaching on a final decision can be: Will the quality of work done by new machine be better than the old machine? Can the funds that will be used for the purchase of a new machine be used somewhere else? What will be the tax effect of the decision?

Answered: Flint Tooling Company is considering…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Flint Tooling Company is considering replacing a machine that has been used in its factory for two 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, eight year life	$40,000
Annual depreciation (straight line)	5,000
Annual manufacturing costs, excluding depreciation	12,400
Annual nonmanufacturing operating expenses	2,900
Annual revenue	35,400
Current estimated selling price of the machine	13,900

New Machine
Cost of machines, six year life	$59,000
Annual depreciation (straight line)	9,500
Estimated annual manufacturing cost, less depreciation	3,900

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

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 income that would result over the six-year period if the new machine is acquired.
List other factors that should be considered before a final decision is reached.

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