Question

Differential Analysis Report for Machine Replacement

Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $91,300, the accumulated depreciation is $36,500, its remaining useful life is five years, and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $171,800. 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 current and proposed operations:

	Current Operations		Proposed Operations
Sales	$289,400		$289,400
Direct materials	$98,600		$98,600
Direct labor	68,500		22,800
Power and maintenance	6,400		11,000
Taxes, insurance, etc.	2,300		7,600
Selling and administrative expenses	68,500		68,500
Total expenses	$244,300		$208,500

a. Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs anticipated.

LONE WOLF TECHNOLOGIES
Replace Machine
Differential Analysis Report
Annual costs and expenses—present machine	$
Annual costs and expenses—new machine
	$
Number of years applicable	×
	$
Cost of new machine
	$
Annual net differential decrease in costs and expenses—new machine	$

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

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

Do both present and proposed operations provide the same capacity?

What are the opportunity costs associated with alternative uses of the $171,800 outlay required to purchase the automatic machine?

Is the product improved by using automatic machinery?

What is the book value of the manually operated machine that will be replaced?

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

Answer 1

b). Based on the above data, the proposal should be accepted because there is net annual savings of $1440
c). Other factors to be considered includes the quality, production units and normal or abnormal loss in material usage which will impact the profitability of the product, Hence these factors should also be considered.
d). As per the details given, sales are same in both the cases hence it can be said both the options provide same capacity because there is no other information available related to the capacity.
e). Opportunity cost related to the outlay of $171800 will be interest at risk free rate which the company earn if it does not use this amount in machine. It will invest in the market.
f) further information required to answer this part.
g). Book value of manually operated machine = 91300 - 36500 = $54800