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Differential Analysis Report for Machine Replacement

Lone Wolf Technologies Inc. assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $75,000, the accumulated depreciation is $30,000, its remaining useful life is eight years, and its residual value is zero. A proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $160,000. The automatic machine has an estimated useful life of eight years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on current and proposed operations:

	Current Operations		Proposed Operations
Sales	$3,800,000		$3,800,000
Direct materials	$500,000		$500,000
Direct labor	150,000		50,000
Power and maintenance	10,000		60,000
Taxes, insurance, etc.	5,000		12,000
Selling and administrative expenses	200,000		200,000
Total expenses	$865,000		$822,000

a. Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the eight years and the net annual differential change in costs anticipated.

LONE WOLF TECHNOLOGIES
Replace Machine
Differential Analysis Report
Annual costs and expensespresent machine	$
Annual costs and expensesnew machine
ANSWER IS ONE OR THE OTHER Annual differential decrease in costs and expenses Annual differential increase in costs and expenses	$
Number of years applicable
ANSWER IS ONE OR THE OTHER Total differential decrease in costs and expenses Total differential increase in costs and expenses	$
Cost of new machine
ANSWER IS ONE OR THE OTHER Net differential decrease in costs and expenses, eight-year total Net differential increase in costs and expenses, eight-year total	$
Annual net differential decrease in costs and expensesnew machine	$

b. Based only on the data presented, should the proposal be accepted?

ANSWER IS ONE OR THE OTHER

• Yes
• No

c. What are some of the other factors that should be considered before a final decision is made?

1. Do both present and proposed operations provide the same capacity?
2. What are the opportunity costs associated with alternative uses of the $160,000 outlay required to purchase the automatic machine?
3. Is the product improved by using automatic machinery?
4. What is the book value of the manually operated machine that will be replaced?

Select the relevant factor(s) from the list above. ANSWER IS ONE OF THESE BELOW:

• 1 only
• 1, 2, and 3 only
• 2 and 3 only
• 3 and 4 only
• 1, 2, 3 and 4

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