Replace Equipment A machine with a book value of 246300 has

Replace Equipment A machine with a book value of $246,300 has an estimated six-year life. A proposal is offered to sell the old machine for $216,200 and replace it with a new machine at a cost of $281,800. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $50,400 to $40,300 a. Prepare a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). If an amount is zero, enter \"O\". Use a minus sign to indicate subtracted or negative numbers or a loss Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) April 11 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine 216,200 216,200 Costs Purchase price -281,800 281,800 Direct labor (6 years) Income (Loss) b. Should the company continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)? Continue with the old machine

Solution

Answer

----Note: Figures within “( )” means negative (with minus sign) figures------

Continue with Old Machine

Replace Old Machine

Differential effect on Net Income

[Alternative 1]

[Alternative 2]

[Alternative 2]

Revenues:

Proceeds from sale of old machine

$                                -  

$    216,200.00

$     216,200.00

Costs:

Purchase price

$                                -  

$ (281,800.00)

$   (281,800.00)

Direct labor (6 years)

$            (302,400.00)      [50,400 x 6 years]

$ (241,800.00) [40,300 x 6 years]

$       60,600.00

Income (Loss)

$            (302,400.00)

$ (307,400.00)

$       (5,000.00)

The Company should CONTINUE WITH OLD MACHINE because under Alternative 2, Net result is $ 307,400 of loss, which is $ 5,000 more LOSS than Alternative 1.

	Continue with Old Machine	Replace Old Machine	Differential effect on Net Income
	[Alternative 1]	[Alternative 2]	[Alternative 2]
Revenues:
Proceeds from sale of old machine	$                                -	$    216,200.00	$     216,200.00
Costs:
Purchase price	$                                -	$ (281,800.00)	$   (281,800.00)
Direct labor (6 years)	$            (302,400.00)      [50,400 x 6 years]	$ (241,800.00) [40,300 x 6 years]	$       60,600.00
Income (Loss)	$            (302,400.00)	$ (307,400.00)	$       (5,000.00)