Jerrod Company owns a machine with a cost of $305,000 and accumulated depreciation of $45,000 that can be sold for $231,000

Jerrod Company owns a machine with a cost of $305,000 and accumulated depreciation of $45,000 that can be sold for $231,000, less a 5% sales commission. Alternatively, the machine can be leased by Jerrod Company for three years for a total of $243,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Jerrod Company on the machine would total $16,900 over the three years. Prepare a differential analysis on January 12, 2014, as to whether Jerrod Company should lease (Alternative 1) or sell (Alternative 2) the machine.

Answer:

Differential Analysis 

Lease Machine (Alt. 1) or Sell Machine (Alt. 2) 

January 12, 2014 

  

Lease 

Machine 

(Alternative 1) 

Revenues $243,000 $231,000 –$12,000 

Costs –16,900 –11,550* 5,350 

Income (Loss) $226,100 $219,450 –$  6,650 

    

* $231,000 × 5% 

Jerrod Company should lease the machine.