Question

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 $90,100, the accumulated depreciation is $36,000, 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 $187,400. 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	$285,600		$285,600
Direct materials	$97,300		$97,300
Direct labor	67,600		—
Power and maintenance	6,300		33,300
Taxes, insurance, etc.	2,300		7,500
Selling and administrative expenses	67,600		67,600
Total expenses	$241,100		$205,700

a. Prepare a differential analysis dated May 4, to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0".

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 Effect on Income (Alternative 2)
Sales (5 years)	$	$	$
Costs:
Purchase price
Direct materials (5 years)
Direct labor (5 years)
Power and maintenance (5 years)
Taxes, insurance, etc. (5 years)
Selling and admin. expenses (5 years)
Income (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.

Answer 1

a. Prepare a differential analysis dated May 4, to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
4-May
	Continue with Old Machine	Replace Old Machine	Differential Effect on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Sales (5 years)	1428000	1428000	0
Costs:
Purchase price	0	187400	187400
Direct materials (5 years)	486500	486500	0
Direct labor (5 years)	338000		-338000
Power and maintenance (5 years)	31500	166500	135000
Taxes, insurance, etc. (5 years)	11500	37500	26000
Selling and admin. expenses (5 years)	338000	338000	0
Income (Loss)	222500	212100	-10400

Working notes for the above answer is as under

_______________________________________________________________________________

b. Based only on the data presented, should the proposal be accepted?

Answer: The proposal should not be accepted

_______________________________________________

c.

yes,

Differences in capacity between the two alternatives is  to consider before a final decision is made.