Question

Differential Analysis Report for Machine Replacement Proposal

Flint Tooling Company is considering replacing a machine that has been used in its factory for four 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, 10-year life	$109,500
Annual depreciation (straight-line)	10,950
Annual manufacturing costs, excluding depreciation	38,700
Annual nonmanufacturing operating expenses	11,700
Annual revenue	94,100
Current estimated selling price of the machine	35,200
New Machine
Cost of machine, six-year life	$136,200
Annual depreciation (straight-line)	22,700
Estimated annual manufacturing costs, exclusive of depreciation	17,500
Annual nonmanufacturing operation expenses	10,000

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

Required:

1. Prepare a differential analysis report comparing operations utilizing the new machine with operations using the old machine. The analysis should indicate the differential income that would result over the six-year period if the new machine is acquired. Enter all amounts as positive numbers.

Flint Tooling Company
Proposal to Replace Machine
Annual manufacturing costs associated with present machine	$
Annual manufacturing costs associated with proposed new machine
Annual reduction in manufacturing costs	$
Number of years applicable	x
Cost reduction attributable to difference in manufacturing costs	$
Proceeds from sale of present machine
	$
Cost of new machine
Differential income anticipated from replacement, six-year total	$

2. What are some of the other factors that should be considered before a final decision is made?

1. Are there any improvements in the quality of work turned out by the new machine?
2. What other opportunities are available for the use of the funds that are required to purchase the new machine?
3. What effect does the federal income tax have on the decision?
4. What is the book value of the machine that will be replaced?

Select the relevant factor(s) from the list above.

Answer 1

Answer a:

Note: Although the standard format for differential analysis is different (with 3 columns: one each for 2 alternatives and one for differential), I have to use the format as given in the question and I have done so.

Answer b:

Explanation:

The other relevant that should be considered are:

1. The impact if any from improvement in quality

2. Alternative use of funds which could have higher returns or higher NPV.

3. Impact of federal income tax. As there is no tax information given, in the above analysis we did not consider depreciation since there is no depreciation tax shield. But impact of federal income tax, if any, need to be considered as depreciation is tax deductible.

Book value machine is a sunk cost and is not relevant.