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 $88,800, the accumulated depreciation is $35,500, 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 $184,700. 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 Operations   Proposed Operations   Sales $281,500   $281,500   Direct materials $95,900   $95,900   Direct labor 66,600   —   Power and maintenance 6,200   32,900   Taxes, insurance, etc. 2,200   7,400   Selling and administrative expenses 66,600   66,600   Total expenses $237,500   $202,800   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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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 $88,800, the accumulated depreciation is $35,500, 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 $184,700. 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
Operations
  Proposed
Operations
 
Sales $281,500   $281,500  
Direct materials $95,900   $95,900  
Direct labor 66,600    
Power and maintenance 6,200   32,900  
Taxes, insurance, etc. 2,200   7,400  
Selling and administrative expenses 66,600   66,600  
Total expenses $237,500   $202,800  

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
  Continue
with Old
Machine
(Alternative 1)
Replace
Old
Machine
(Alternative 2)
Differential
Effects
(Alternative 2)
Revenues:      
Sales (5 years)      
Costs:      
Purchase price      
Direct materials (5 years)      
Direct labor (5 years)      
ower and maintenance (5 years)      
Tas, insurance, etc. (5 years)      
ing and admin. expenses (5 years)      
 (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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