Question

Differential Analysis for Machine Replacement

Taipei Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $55,300, the accumulated depreciation is $22,100, its remaining useful life is five years, and its residual value is negligible. On September 27, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $115,000. 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 present and proposed operations:

	Present Operations		Proposed Operations
Sales	$175,300		$175,300
Direct materials	59,700		59,700
Direct labor	41,500		—
Power and maintenance	3,900		20,500
Taxes, insurance, etc.	1,400		4,600
Selling and administrative expenses	41,500		41,500
Total expenses	$148,000		$126,300

a. Prepare a differential analysis dated September 27, to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter zero "0".

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
September 27
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues:
Sales (5 years)	$	$	$
Costs:
Purchase price
Direct materials (5 years)
Direct labor (5 years)
Power and maintenance (5 years)
Taxes, insurance, etc. (5 years)
Selling and admin. expenses (5 years)
Income (Loss)	$	$	$

b. Based only on the data presented, should the proposal be accepted?
Should not be accepted

c. Differences in capacity between the two alternatives is not relevant to consider before a final decision is made.

Answer 1