Differential analysis for machine replacement proposal Flint Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows: Old Machine Cost of machine, eight-year life $38,000 Annual depreciation (straight- line) 4,750 Annual manufacturing costs, excluding depreciation 12,400 Annual nonmanufacturing operating expenses 2,700 Annual revenue 32,400 Current estimated selling price of the machine 12,900 New Machine Cost of machine, six-year life $57,000 Annual depreciation (straight-line) 9,500 Estimated annual manufacturing costs, exclusive of depreciation 3,400 Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine. Instructions 1. Prepare a differential ananlysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine(Alternative 2). The analysis should indicate the differential income that would result over the six- year period if the new machine is acquired. 2. List other factors that should be considered before a final decision is reached.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Differential analysis for machine replacement proposal

Flint Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Old Machine

Cost of machine, eight-year life	$38,000
Annual depreciation (straight- line)	4,750
Annual manufacturing costs, excluding depreciation	12,400
Annual nonmanufacturing operating expenses	2,700
Annual revenue	32,400
Current estimated selling price of the machine	12,900
New Machine
Cost of machine, six-year life	$57,000
Annual depreciation (straight-line)	9,500
Estimated annual manufacturing costs, exclusive of depreciation	3,400

Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Instructions

1. Prepare a differential ananlysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine(Alternative 2). The analysis should indicate the differential income that would result over the six- year period if the new machine is acquired.

2. List other factors that should be considered before a final decision is reached.

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