E12-9 Differential analysis report for machine replacement sidney Technologies I
ID: 2523153 • Letter: E
Question
E12-9 Differential analysis report for machine replacement sidney Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000, the accumulated depreciation is $24,000, its remaining useful life is five years, and its residual value is negligible. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $225,000. 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: increas and Proposed Operations $400,000 $100,000 Present Operations Sales Direct materials Direct labor Power and maintenance Taxes, insurance, etc. Selling and administrative expenses Total expenses $400,000 $100,000 65,000 8,000 4,000 90,000 $267,000 23,000 14,000 90,000 $227,000 re a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the five years and the net annual differential change in costs anticipated. a. Prepa b. Based only on the data presented, should the proposal be accepted? t are some of the other factors that should be considered before a final decision is made? c. WhaExplanation / Answer
Proposal to Replace Machine
Annual cost and expenses- Present Machine $ 77,000
Annual cost and expenses- Present Machine $ 37,000
Annual differential decrease in cost and Expense $ 40,000
Number of years applicable 5
Total differential decrease in cost and expense $ 2, 00,000
Cost of new equipment $ 2, 25,000
Net differential increase in cost and expense, 5 yeas total $ 25,000
Annual differential increase in cost and expense – new machine $ 5,000
Note: - If we consider only financial prospective then it is not advisable to replace the machine.
Working Note
Calculation of annual cost and expenses of present machine and new machine
Particulars
Present Machine
New Machine
Direct Labor
$ 65,000
-
Power and Maintenance
$ 8,000
$ 23,000
Taxes, Insurance etc
$ 4,000
$ 14,000
Total Expense
$ 77,000
$ 37,000
Note: - Differential analysis involves analyzing the different cost and benefit that would arise from alternative solution. This method ignores cost that remains largely constant among the alternative. In this question direct material ($ 1,00,000) and selling and administrative expenses($ 90,000) are same under both alternatives, so these costs are not considered.
Particulars
Present Machine
New Machine
Direct Labor
$ 65,000
-
Power and Maintenance
$ 8,000
$ 23,000
Taxes, Insurance etc
$ 4,000
$ 14,000
Total Expense
$ 77,000
$ 37,000
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