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 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
| 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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