BOOK:ACCOUNTIN 25th edition (Warren,Reeve,Duchac) Problem:EX 25-10 Kim Kwon Digi
ID: 2476782 • Letter: B
Question
BOOK:ACCOUNTIN 25th edition (Warren,Reeve,Duchac)
Problem:EX 25-10
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 , the accumulated depreciation is , its remaining useful life is five years, and its residual value is negligible. On May 4, 2014, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost . 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:
Prepare a differential analysis dated May 4, 2014, 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.
Answer
Check Figure: Differential loss,
Based only on the data presented, should the proposal be accepted?
Differential Analysis Keep or Replace Machine May 4, 2014 Continue with Replace Differential Effect Old Machine Old Machine on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Sales (5 years) $ - Costs: Purchase price - Direct materials (5 years) Direct labor (5 years) Power and maintenance (5 years) Taxes, insurance, etc. (5 years) Selling and admin. expenses (5 years) Income (loss) The proposal be accepted.Explanation / Answer
Present Operations Proposed Operations Differential Analysis Sales 205000 205000 0 Direct Material -72000 -72000 0 Direct Labor -51000 0 51000 Power and maintenance -5000 -18000 -13000 Taxes, Insurance, etc -1500 -4000 -2500 Selling and Administrative exp -45000 -45000 0 Total Expenses -174500 -139000 35500 Profit 30500 66000 35500 Decision PROPOSAL SHOULD BE ACCEPTED BECAUSE OF INCREMENTAL PROFIT
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