Kim Kwon Digital Components Company assembles circuit boards by using a manually
ID: 2522941 • Letter: K
Question
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 $61,880, the accumulated depreciation is $23,430, 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 $180,720. 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:
1
Present Operations
Proposed Operations
2
Sales
$205,380.00
$205,380.00
3
Direct materials
$72,265.00
$72,265.00
4
Direct labor
52,625.00
0.00
5
Power and maintenance
5,230.00
17,735.00
6
Taxes, insurance, etc.
1,365.00
5,840.00
7
Selling and administrative expenses
45,445.00
45,445.00
8
Total expenses
$176,930.00
$141,285.00
Differential Analysis
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. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
1
Present Operations
Proposed Operations
2
Sales
$205,380.00
$205,380.00
3
Direct materials
$72,265.00
$72,265.00
4
Direct labor
52,625.00
0.00
5
Power and maintenance
5,230.00
17,735.00
6
Taxes, insurance, etc.
1,365.00
5,840.00
7
Selling and administrative expenses
45,445.00
45,445.00
8
Total expenses
$176,930.00
$141,285.00
Explanation / Answer
Requirement a) Continue with old machine Replace the old machine Year Initial Investment Cash flow Initial Investment Cash flow 0 38450 -38450 180720 -180720 1 28450 64095 2 28450 64095 3 28450 64095 4 28450 64095 5 28450 64095 Payback period 1 year and 4.22 months 2 Years and 2.16 months Average/Accounting rate of return 73.99219766 35.4664675 Internal Rate of Return 69% 23% Requirement b) Based on the data presented, the proposal should not be accepted Requirement c) In future, if sales increases, it may give rise to higher return due to lower variable costs as envisaged in the form of direct labor. However, if we replace the old machine, we need to review our retrenchment policy of labor, if they are working on permanent basis.
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