Skiles Coporation is a manufacturer of classic rocking chairs. The company has b
ID: 2337734 • Letter: S
Question
Skiles Coporation is a manufacturer of classic rocking chairs. The company has been using a particular sanding and finishing machine for over 10 years and believes that it may be time to replace the machine. The company is trying to decide whether replacing the old machine is a wise economic decision. The company's controller pulled together the following information on the old machine and the new possible replacement machine.
Old Machine:
Original cost$430,100
Current accumulated depreciation324,000
Estimated annual variable manufacturing costs for machine72,550
Estimated selling price of machine187,000
Estimated remaining useful life (in years) 6
New Machine:
Purchase cost$791,000
Estimated annual variable manufacturing costs for machine45,150
Estimated residual value0
Estimated useful life (in years) 6
My question:
Fill in the differential analysis.
Replace or Keep DecisionDifferential Analysis Report Cost of replacing old machine: Annual differential decrease in cost x number of years Total differential decrease in cost Proceeds from sale of present machine Cost of new machine Net differential (increase)/decrease in cost, six year total
Explanation / Answer
Cost of replacing old machine:
Annual differential decrease in cost:
Decrease in Variable Cost (A)= 72,550-45,150 = 27400
Number of Years = 6
Total differential decease in Cost (C)= 27400*6 = 164,400
Proceeds from sale of present machine (D)= 187,000
Cost of new machine (E)= $791,000
Net differential (increase)/decrease in cost, six year total = C+D-E
=164,400+187000-791000 = (439,600)
Hence, increase in cost by $439,600
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