Chapter 10, Problem 10E

Differential analysis for machine replacement

Kim Kwon Digital Components Company assembles circuit hoards 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 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

• A. Prepare a differential analysis dated May 4 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. 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 are some of the other factors that should be considered before a final decision is made?