Kim Kwon Digital Components Company assembles circuit boards by using a manually
ID: 2606605 • 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 $66,900, the accumulated depreciation is $26,800, 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 $139,200. 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:
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. If an amount is zero, enter zero "0".
Based only on the data presented, should the proposal be accepted?
Differences in capacity between the two alternatives is (relevant/not relevant) to consider before a final decision is made.
Present Operations Proposed Operations Sales $212,100 $212,100 Direct materials $72,300 $72,300 Direct labor 50,200 — Power and maintenance 4,700 24,800 Taxes, insurance, etc. 1,700 5,600 Selling and administrative expenses 50,200 50,200 Total expenses $179,100 $152,900Explanation / Answer
The differential analysis of the two alternatives is presented below:
Based on the above analysis, it is recommended that the old machine should not be replaced as the differential income is negative. This means the incremental costs are more than the incremental savings. The savings is in the form of decrease in labour costs, however the increase in other costs as well as the purchase price offset the savings, hence it is recommended not to replace the old machine and continue with the old machine.
Differential Analysis Continue with old machine(Alt 1)or Replace old machine (Alt 2) Continue with old machine (Alt 1) Replace old machine(Alt 2) Differential effect on income Revenues: Sales (5 years) $10,60,500 $10,60,500 $0 Costs: Purchase price $0 -$1,39,200 -$1,39,200 Direct materials -$3,61,500 -$3,61,500 $0 Direct labour -$2,51,000 $0 $2,51,000 Power and maintainence -$23,500 -$1,24,000 -$1,00,500 Taxes, insurance, -$8,500 -$28,000 -$19,500 Selling and admin expenses -$2,51,000 -$2,51,000 $0 Income $1,65,000 $1,56,800 -$8,200Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.