Question

Skiles Coporation is a manufacturer of classic rocking chairs. The company has been using a particular sanding and finishing machine for over 10 years and believes that it may be time to replace the machine. The company is trying to decide whether replacing the old machine is a wise economic decision. The company's controller pulled together the following information on the old machine and the new possible replacement machine.

Old Machine:
Original cost	$428,700
Current accumulated depreciation	315,600
Estimated annual variable manufacturing costs for machine	72,650
Estimated selling price of machine	186,000
Estimated remaining useful life (in years)	6
New Machine:
Purchase cost	$814,500
Estimated annual variable manufacturing costs for machine	50,950
Estimated residual value	0
Estimated useful life (in years)	6

Select the relevant or irrelevant information below:

Annual variable costs of old machine	Relevant
Selling price of old machine	Relevant
Matching lives	Relevant
Purchase price of new machine	Relevant
Accumulated depreciation of old machine	Irrelevant

Fill in the differential analysis.

Replace or Keep Decision Differential Analysis Report
Cost of replacing old machine:
Annual differential decrease in cost	$
x number of years
Total differential decrease in cost
Proceeds from sale of present machine		$
Cost of new machine
Net differential (increase)/decrease in cost, six year total		$

Answer 1

Cost of Replacing Old Machine :	( Amount in $ )
Annual Differential Decrease in Cost (Estimated annual variable manufacturing costs for machine - Estimated annual variable manufacturing costs for machine) ( 72,650-50,950) (a)	21,700
X
Number of Years (b)	6
Total differential decrease in cost (c = a*b)	130,200
Proceeds from sale of present machine (d)	186,000
Cost of New Machine (e )	-814,500
Net differential (increase)/decrease in cost, six year total (f = c+d-e)	-498,300