Sunday, September 22, 2019

A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500

A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500 and replace it with a new machine at a cost of $75,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $11,200 to $7,400. Prepare a differential analysis dated April 11, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

Answer:
Differential Analysis 
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) 
April 11, 2014 
 Continue 
with Old 
Machine 
(Alternative 1) 
Revenues:    
Proceeds from sale of old machine $ 0 $50,500 $50,500 
Costs:    
Purchase price 0 –75,000 –75,000 
Direct labor (5 years) –56,000I
ncome (Loss) –$56,000 –$61,500 –$  5,500 
    
$11,200 × 5 years 
$7,400 × 5 years 
The company should continue with the old machine. 

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