Homework SourseDifferential Analysis for Machine Replacement Kim Kwon Digit
Differential Analysis for Machine Replacement
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 $54,600, the accumulated depreciation is $21,800, 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 $113,600. 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:
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. If an amount is zero, enter zero \"0\".
b. Based only on the data presented, should the proposal be accepted?
________ (should be accepted or should not be accepted)
c. Differences in capacity between the two alternatives is ____ (relevant or not relevant) to consider before a final decision is made.
| Present Operations | Proposed Operations | |||
| Sales | $173,100 | $173,100 | ||
| Direct materials | $59,000 | $59,000 | ||
| Direct labor | 41,000 | — | ||
| Power and maintenance | 3,800 | 20,200 | ||
| Taxes, insurance, etc. | 1,400 | 4,500 | ||
| Selling and administrative expenses | 41,000 | 41,000 | ||
| Total expenses | $146,200 | $124,700 |
Solution
If any doubt please comment
| Ans 1 | |||
| (Alternative 1) | (Alternative 2) | (Alternative 2) | |
| Revenues: | |||
| Sales (5 years) | 865500 | 865500 | 0 |
| (173100*5) | (173100*5) | ||
| Costs: | |||
| Purchase price | 0 | 113600 | -113600 |
| Direct materials (5 years) | 295000 | 295000 | 0 |
| (59000*5) | (59000*5) | ||
| Direct labor (5 years) | 205000 | 205000 | |
| (41000*5) | |||
| Power and maintenance (5 years) | 19000 | 101000 | -82000 |
| (3800*5) | (20200*5) | ||
| Taxes, insurance, etc. (5 years) | 7000 | 22500 | -15500 |
| (1400*5) | (4500*5) | ||
| Selling and admin. expenses (5 years) | 205000 | 205000 | 0 |
| (41000*5) | (41000*5) | ||
| Income (Loss) | 134500 | 128400 | 6100 |
| b) Yes the proposal must be accepted as there is increase in income by $6100 | |||
| c) Is relevant |
