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 $60,000, the accumulated depreciation is $24,000, 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 $180,000. 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 operations: Present Proposed Operations Operations Sales $205,000 $ 72,000 $205,000 Direct materials $ 72,000 Direct labor 51,000 Power and maintenance 5,000 18,000 Taxes, insurance, etc. 1,500 4,000 Selling and administrative expenses 45,000 45,000 Total expenses $174,500 $139,000 (Continued) rential Analysis, Product Pricing, and Activity-Based Costing 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. b. Based only on the data presented, should the proposal be accepted? C. What other factors should be considered before a final decision is made,
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 $60,000, the accumulated depreciation is $24,000, 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 $180,000. 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 operations: Present Proposed Operations Operations Sales $205,000 $ 72,000 $205,000 Direct materials $ 72,000 Direct labor 51,000 Power and maintenance 5,000 18,000 Taxes, insurance, etc. 1,500 4,000 Selling and administrative expenses 45,000 45,000 Total expenses $174,500 $139,000 (Continued) rential Analysis, Product Pricing, and Activity-Based Costing 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. b. Based only on the data presented, should the proposal be accepted? C. What other factors should be considered before a final decision is made,
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:**Differential Analysis for Machine Replacement**
**Objective:**
This exercise focuses on conducting a differential analysis for the potential replacement of manufacturing equipment within a company.
**Background:**
Kim Kwon Digital Components Company assembles circuit boards using a manually operated machine to insert electronic components. The original cost of the machine is $60,000, with an accumulated depreciation of $24,000. The machine’s remaining useful life is five years, and its residual value is considered negligible. On May 4 of the current year, a proposal was made to transition to a fully automatic machine priced at $180,000. The automatic machine has a useful life of five years with no significant residual value.
**Data Collection:**
For sound decision-making, the accountant has gathered the following annual data to compare the present operations with the proposed operations:
| **Category** | **Present Operations** | **Proposed Operations** |
|-----------------------------------|------------------------|------------------------|
| Sales | $205,000 | $205,000 |
| Direct materials | $72,000 | $72,000 |
| Direct labor | $51,000 | — |
| Power and maintenance | $5,000 | $18,000 |
| Taxes, insurance, etc. | $1,500 | $4,000 |
| Selling and administrative expenses| $45,000 | $45,000 |
| **Total expenses** | $174,500 | $139,000 |
**Tasks:**
a. **Prepare a Differential Analysis:**
- **Alternative 1:** Continue with the old machine
- **Alternative 2:** Replace the old machine with the new automatic machine
- Conduct the analysis for the entire useful life of the new machine.
b. **Recommendation:**
- Based solely on the provided data, should the proposal be accepted?
c. **Considerations:**
- Identify other critical factors that should be assessed before reaching a final decision.
**Additional Instructions:**
Ensure that while performing the differential analysis, attention is given to both quantitative and qualitative factors to make a holistic recommendation.
**End of Exercise**
**Note:**
This exercise continues in subsequent sections. Please refer to the extended dataset for a comprehensive evaluation.
![## Differential Analysis: Keep or Replace Machine
_May 4, 2014_
### a. Comparative Financial Analysis
This section involves comparing the financial aspects of continuing with the old machine versus replacing it using the differential analysis approach:
| | Continue with Old Machine (Alternative 1) | Replace Old Machine (Alternative 2) | Differential Effect on Income (Alternative 2 - Alternative 1) |
|--------------------------------|-------------------------------------------|-------------------------------------|-------------------------------------------------------------|
| **Revenues:** | | | |
| Sales (5 years) | | | |
| **Costs:** | | | |
| Purchase price | | | |
| Direct materials (5 years) | | | |
| Direct labor (5 years) | | | |
| Power and maintenance (5 years)| | | |
| Taxes, insurance, etc. (5 years)| | | |
| Selling and admin. expenses (5 years)| | | |
| **Income (loss):** | | | |
The above table is intended to help decision-makers analyze whether to continue with the old machine or invest in a new one by comparing various cost and revenue factors over a 5-year period.
### b. Proposal Acceptance
This section is for concluding whether the proposal should be accepted based on the analysis:
"The proposal \_\_\_\_\_\_\_ be accepted."
### c. Additional Notes/Comments
This section allows for any additional notes or remarks that need to be documented:
[Blank Text Area]
---
The provided spreadsheet template allows for a detailed examination of financial implications involved in the decision to keep or replace machinery, considering various cost components and anticipated revenues over a fixed period. This tool is vital for making informed capital investment decisions within an enterprise.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbf765087-36b1-41ef-a2c9-5842fa530b87%2F13c9c397-6ef5-4d6f-9d2c-ec57f73df808%2Fr74xkml.png&w=3840&q=75)
Transcribed Image Text:## Differential Analysis: Keep or Replace Machine
_May 4, 2014_
### a. Comparative Financial Analysis
This section involves comparing the financial aspects of continuing with the old machine versus replacing it using the differential analysis approach:
| | Continue with Old Machine (Alternative 1) | Replace Old Machine (Alternative 2) | Differential Effect on Income (Alternative 2 - Alternative 1) |
|--------------------------------|-------------------------------------------|-------------------------------------|-------------------------------------------------------------|
| **Revenues:** | | | |
| Sales (5 years) | | | |
| **Costs:** | | | |
| Purchase price | | | |
| Direct materials (5 years) | | | |
| Direct labor (5 years) | | | |
| Power and maintenance (5 years)| | | |
| Taxes, insurance, etc. (5 years)| | | |
| Selling and admin. expenses (5 years)| | | |
| **Income (loss):** | | | |
The above table is intended to help decision-makers analyze whether to continue with the old machine or invest in a new one by comparing various cost and revenue factors over a 5-year period.
### b. Proposal Acceptance
This section is for concluding whether the proposal should be accepted based on the analysis:
"The proposal \_\_\_\_\_\_\_ be accepted."
### c. Additional Notes/Comments
This section allows for any additional notes or remarks that need to be documented:
[Blank Text Area]
---
The provided spreadsheet template allows for a detailed examination of financial implications involved in the decision to keep or replace machinery, considering various cost components and anticipated revenues over a fixed period. This tool is vital for making informed capital investment decisions within an enterprise.
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