Question

Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $598,100 and has $347,800 of accumulated depreciation to date, with a new machine that has a purchase price of $483,800. The old machine could be sold for $62,000. The annual variable production costs associated with the old machine are estimated to be $158,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,500 per year for eight years.

a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old 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)
April 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine
Costs:
Purchase price
Variable productions costs (8 years)
Income (Loss)

Answer 1

Answer:

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 29
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Proceeds from sale of old machine		62,000	62,000
Costs:
Purchase price	-	-483,800	-483,800
Variable productions costs (8 years)	-1,264,000)	-812,000	452,000
Income (Loss)	-1,264,000)	-1,233,800	30,200

Calculation:

Here we need to prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.

For that we need to take the Proceeds from sale of old machine of 62,000 for Replacing
Old Machine. And there is no Proceeds from sale of old machine for  Continue with Old Machine.

Then we need to deduct the Costs. That is Purchase price for Replacing Old Machine.

Then we need to deduct the Variable productions costs.

Continue with Old Machine = 158,000 x 8 = 1,264,000

Replace Old Machine = 101,500 x 8 = 812,000

Deducting these costs from revenue gives Income (Loss).

Then we need find the difference of the Continue with Old Machine and Replace Old Machine to get the Differential Effect on Income.