Reference no: EM132687530
Problem - Differential Analysis for Machine Replacement Proposal
Saginaw Tooling Company is considering replacing a machine that has been used in its factory for two 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, eight-year life $44,000
Annual depreciation (straight-line) 5,500
Annual manufacturing costs, excluding depreciation 16,300
Annual nonmanufacturing operating expenses 3,100
Annual revenue 29,600
Current estimated selling price of the machine 21,000
New Machine
Cost of machine, six-year life $72,000
Annual depreciation (straight-line) 12,000
Estimated annual manufacturing costs, exclusive of depreciation 5,900
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 September 10, 2012, comparing operations using the present equipment (Alternative 1) with operations using the new equipment (Alternative 2). The analysis should indicate the 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.