Question

Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000, the accumulated depreciation is $25,890, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $166,615. 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:

1		Present Operations	Proposed Operations
2	Sales	$206,500.00	$206,500.00
3	Direct materials	$73,165.00	$73,165.00
4	Direct labor	49,450.00	0.00
5	Power and maintenance	4,275.00	18,680.00
6	Taxes, insurance, etc.	1,370.00	3,495.00
7	Selling and administrative expenses	43,710.00	43,710.00
8	Total expenses	$171,970.00	$139,050.00

	Required:
A.	Prepare a differential analysis dated May 4 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. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B.	Based only on the data presented, should the proposal be accepted?
C.	What other factors should be considered before a final decision is made?

Labels and Amount Descriptions

Labels
Cash flows from investing activities
Costs
May 4
Revenues
Amount Descriptions
Direct labor
Direct materials
Gain on sale of investments
Income (loss)
Loss on sale of investments
Power and maintenance
Purchase price
Sales
Selling and administrative expenses
Taxes, insurance, etc.
Total costs

Differential Analysis

A. Prepare a differential analysis dated May 4 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. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Differential Analysis

Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2)

1		Continue with Old Machine	Replace Old Machine	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6
7
8
9
10
11
12

Final Questions

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

Should not be accepted

Should be accepted

C. What other factors should be considered before a final decision is made? Check all that apply.

Differences in capacity between the two alternatives

Book value of the original machine

Opportunity costs associated with alternative uses of the $166,615 purchase price

Differences in product quality between the two alternatives

Cost of supplies and inventory purchased in the past

Answer 1

Solution A:

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
	Continue with Old Machine (Alt. 1)	Replace Old Machine (Alt. 2)	Differential effect on Income (Alt.2)
Revenues:
Sales (5 years)	$10,32,500	$10,32,500	$0.00
Costs:
Purchase price	$0	-$1,66,615	-$1,66,615.00
Direct materials (5 years)	-$3,65,825	-$3,65,825	$0.00
Direct labor (5 years)	-$2,47,250	$0	$2,47,250.00
Power and maintenance (5 years)	-$21,375	-$93,400	-$72,025.00
Taxes, insurance, etc. (5 years)	-$6,850	-$17,475	-$10,625.00
Selling and administrative expenses (5 years)	-$2,18,550	-$2,18,550	$0.00
Income (Loss)	$1,72,650	$1,70,635	-$2,015

Solution B:

Based only on the data presented, the proposal "should not be accepted".

Solution C:

The following  other factors should be considered before a final decision is made:

-Opportunity costs associated with alternative uses of the $166,615 purchase price.

-Differences in product quality between the two alternatives