In: Accounting
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
Shaded cells have feedback.
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.
Score: 67/147
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) |
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3 |
✔ |
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4 |
✔ |
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5 |
✔ |
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6 |
✔ |
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7 |
✔ |
✔ |
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8 |
✔ |
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9 |
✔ |
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10 |
✔ |
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11 |
✔ |
✔ |
✔ |
✔ |
12 |
✔ |
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, should the proposal should not be accepted.
Solution C:
The following other factors should be considered before a final decision is made:
- Differences in product quality between the two alternatives |
- Opportunity cost of Alternative use of purchase price of $166615 |