Differential Analysis for Machine Replacement Boyer Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $50,700, the accumulated depreciation is $20,300, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $105,500. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

Present Operations Proposed Operations
Sales $160,700 $160,700
Direct materials $54,800 $54,800
Direct labor 38,000 —
Power and maintenance 3,500 18,800
Taxes, insurance, etc. 1,300 4,200
Selling and administrative expenses 38,000 38,000
Total expenses $135,600 $115,800

Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

Continue with old machine

Explanation:

                                   Differential Analysis

Continue with Old Machine (Alt.1)or Replace Old Machine (Alt.2

                                             May-04

                    Continue with Old     Replace Old           Diff. effects                                        Machine (Alt. 1)      Machine (Alt.2)             (Alt. 2)  

Revenues:    

Sale ( 5 years)   803,500             803,500                       0

Costs:    

Purchase price0                       -105,500                  105,500

Direct materials  -274,000         -274,000                      0

( 5 years)

Direct labor        -190,000                0                       -190,000

( 5 years)

Power and          -17,500               -94,000               76,500

maintenance

Taxes, insurance  -6,500              -21,000                14,500

etc ( 5 years)

Selling and          -190,000             -190,000                0

administrative

expense ( 5 years)

Total expenses    -678,000            -684,500             6,500

Profit (Loss)          $125,500              $119,000           $6,500

Hence it is advantageous to continue with old machine. Net incremental advantage of continuing with old machine = $6,500