Kim Kwon Digital Components Company assembles circuit boards

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 $66,900, the accumulated depreciation is $26,800, 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 $139,200. 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\".

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

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

Solution

The differential analysis of the two alternatives is presented below:

Based on the above analysis, it is recommended that the old machine should not be replaced as the differential income is negative. This means the incremental costs are more than the incremental savings. The savings is in the form of decrease in labour costs, however the increase in other costs as well as the purchase price offset the savings, hence it is recommended not to replace the old machine and continue with the old machine.