1. Prepare a differential anaysis comparing present machine (Alt. 1) to new machine (Alt. 2). Analysis should indicate total differential income over the six-year period if the new machine is purchased.2. Which Alternative would you propose? What other factors should be considered?3. What if you could invest the funds required to purchase the new equipment (cost less proceeds from sale of old machine) at 4% per year. Does this change your viewpoint? What does this indicate of the limitations of this method for evaluating an investment proposal? **Title: Analysis of Machine Replacement for Johnson Co.****Introduction:**Johnson Co. is evaluating the replacement of a machine that has been operating for four years. It's assumed that neither the existing nor the new machine will have any residual value. Yearly revenue and nonmanufacturing expenses remain unchanged regardless of the machine used.**Old Machine:**- **Cost, 10-year life:** $108,000- **Annual Depreciation:** $10,800- **Annual Manufacturing Costs (excl. Depreciation):** $38,600- **Annual Nonmanufacturing Expenses:** $12,300- **Annual Product Revenue:** $95,000- **Selling Price of Machine:** $35,900**New Machine:**- **Cost, 6-year life:** $138,000- **Annual Depreciation:** $23,000- **Annual Manufacturing Costs (excl. Depreciation):** $18,200**Task:**1. **Differential Analysis:** - Compare the current (Old Machine) with the new machine. - Indicate total differential income for a six-year period if the new machine is purchased.**Table:**| | Old Machine (Alt. 1) | New Machine (Alt. 2) | Differential Income ||----------------------|----------------------|----------------------|---------------------|| **Revenues** | | | || **Costs** | | | || **Income (Loss)** | | | |**Questions:**2. **Alternatives Proposal:** - Which alternative would you choose? - What additional factors should be considered?3. **Financial Consideration:** - If funds needed for the new equipment (minus old machine sale) are invested at 4% annually, how does this impact your decision? - What are the limitations of this method when assessing an investment proposal?

A differential analysis is a decision making technique which makes use of the relevant costing…

Answered: Johnson Co. is considering replacing 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. Prepare a differential anaysis comparing present machine (Alt. 1) to new machine (Alt. 2). Analysis should indicate total differential income over the six-year period if the new machine is purchased.

2. Which Alternative would you propose? What other factors should be considered?

3. What if you could invest the funds required to purchase the new equipment (cost less proceeds from sale of old machine) at 4% per year. Does this change your viewpoint? What does this indicate of the limitations of this method for evaluating an investment proposal?

**Title: Analysis of Machine Replacement for Johnson Co.**

**Introduction:**

Johnson Co. is evaluating the replacement of a machine that has been operating for four years. It's assumed that neither the existing nor the new machine will have any residual value. Yearly revenue and nonmanufacturing expenses remain unchanged regardless of the machine used.

**Old Machine:**
- **Cost, 10-year life:** $108,000
- **Annual Depreciation:** $10,800
- **Annual Manufacturing Costs (excl. Depreciation):** $38,600
- **Annual Nonmanufacturing Expenses:** $12,300
- **Annual Product Revenue:** $95,000
- **Selling Price of Machine:** $35,900

**New Machine:**
- **Cost, 6-year life:** $138,000
- **Annual Depreciation:** $23,000
- **Annual Manufacturing Costs (excl. Depreciation):** $18,200

**Task:**

1. **Differential Analysis:**
- Compare the current (Old Machine) with the new machine.
- Indicate total differential income for a six-year period if the new machine is purchased.

**Table:**

| | Old Machine (Alt. 1) | New Machine (Alt. 2) | Differential Income |
|----------------------|----------------------|----------------------|---------------------|
| **Revenues** | | | |
| **Costs** | | | |
| **Income (Loss)** | | | |

**Questions:**

2. **Alternatives Proposal:**
- Which alternative would you choose?
- What additional factors should be considered?

3. **Financial Consideration:**
- If funds needed for the new equipment (minus old machine sale) are invested at 4% annually, how does this impact your decision?
- What are the limitations of this method when assessing an investment proposal?

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