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 $61,600, the accumulated depreciation is $24,600, its remaining useful life is 5 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 $128,100. The automatic machine has an estimated useful life of 5 years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: Proposed Operations Present Operations Sales $195,300 $195,300 Direct materials $66,500 $66,500 Direct labor 46,200 Power and maintenance 4,300 22,800 Taxes, insurance, etc. 1,500 5,100 Seling and administrative expenses 46,200 46,200 Total expenses $164,700 $140,600 a. Prepare a differential analysis dated May 4 to determine whether to Continue with Old Machine (Alternative 1) or Replace 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 Replace Old Continue Differential with Old Machine Effects Machine (Alternative 2) (Alternative 1) (Alternative 2)
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 $61,600, the accumulated depreciation is $24,600, its remaining useful life is 5 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 $128,100. The automatic machine has an estimated useful life of 5 years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: Proposed Operations Present Operations Sales $195,300 $195,300 Direct materials $66,500 $66,500 Direct labor 46,200 Power and maintenance 4,300 22,800 Taxes, insurance, etc. 1,500 5,100 Seling and administrative expenses 46,200 46,200 Total expenses $164,700 $140,600 a. Prepare a differential analysis dated May 4 to determine whether to Continue with Old Machine (Alternative 1) or Replace 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 Replace Old Continue Differential with Old Machine Effects Machine (Alternative 2) (Alternative 1) (Alternative 2)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text: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 $61,600, the accumulated depreciation is $24,600, its remaining useful life is 5 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 $128,100. The automatic machine has an estimated useful life of 5 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
$195,300
$195,300
Direct materials
$66,500
$66,500
Direct labor
46,200
Power and maintenance
4,300
22,800
Taxes, insurance, etc.
1,500
5,100
Selling and administrative expenses
46,200
46,200
Total expenses
$164,700
$140,600
a. Prepare a differential analysis dated May 4 to determine whether to Continue with Oold Machine (Alternative 1) or Replace 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
Replace
Differential
Effects
with Old
Old
Machine
Machine
(Alternative 2)
(Alternative 1) (Alternative 2)
Revenues:
Sales (5 years)
Costs:
Purchase price
-128,100
-128,100
Direct materials (5 years)
Direct labor (5 years)
Power and maintenance (5 years)
Taxes, insurance, etc. (5 years)
Selling and admin. expenses (5 years)
Profit (loss)
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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