Lexigraphic Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:

Old Machine
Cost of machine, 10-year life $89,000
Annual depreciation (straight-line) 8,900
Annual manufacturing costs, excluding depreciation 23,600
Annual non-manufacturing operating expenses 6,100
Annual revenue 74,200
Current estimated selling price of machine 29,700

New Machine
Purchase price of machine, six-year life $119,700
Annual depreciation (straight-line) 19,950
Estimated annual manufacturing costs, excluding depreciation 6,900
Annual non-manufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.

Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired.

Respuesta :

Solution and Explanation:

Particulars Continue with    Replace            Differential impact

                         old machine     old machine   on income  

Revenues:    

Proceeds from

sale of old machine                $29700      $29700  

Cost:      

Purchase price                        $(119700)        $(119700)  

Annual manufacturing

costs ( 6 Years) $(141600)         $(41400)        $100200  

Income / (Loss) $(141600)             $( 311400) $10200  

Therefore, the proporsal must be accepted the proposal is earning with an increase in earning of $10200

2.  The quality that the new machine can produce is very important.

2.a Though $10200 for six years is a income but it is not good income. Therefore, the fund which is used to purchase new machine can be think of using for other alternative.