Question

. Kubat Construction Corporation is considering whether to sell excess machinery or lease it to another party. The equipment has an original cost of SAR 615,000, a current book value of SAR 325,000, and can be sold for SAR 350,000 less a 6% brokerage commission. Alternatively, the machinery could be leased for SAR 90,000 per year for four years, after which it is expected to have no residual value. During the period of the lease, Kubat Construction’s costs for repairs, insurance, and property tax are expected to be SAR 20,000 per year. Use a differential analysis to calculate the differential effect.

Answer 1

	Cell Reference	Particulars	Sell option	Lease option	Differential effect
			A	B	C=A-B
	A	Revenue (Note:-1)	350,000	360,000	(10,000)
	B	Cost (Note:-2)	21,000	80,000	(59,000)
	C=A-B	Profit	329,000	280,000	49,000
		Based on the above differential analysis option to sell the excess machinery is profitable to the Company
	(Note:-1)	Lease for four year=90,000*4=360,000
	(Note:-2)	cost of repair, insurance and property tax for four year=90,000*4=360,000
	(Note:-2)	Brokerage commission =350,000*6%= 21,000