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Problem - Differential Analysis for Machine Replacement Proposal
Franklin 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
$108,000
Annual depreciation (straight-line)
10,800
Annual manufacturing costs, excluding depreciation
38,600
12,300
Annual revenue
95,000
Current estimated selling price of machine
35,900
New Machine
Cost of machine, six-year life
$138,000
23,000
Estimated annual manufacturing costs, exclusive of depreciation
18,200
Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.
Instructions -
1. Prepare a differential analysis as of February 29, 2012, comparing operations using the present equipment (Alternative 1) with operations using the new equipment (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired.
2. List other factors that should be considered before a final decision is reached.
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