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Question 24.4: A machine with a book value of $32,000 has an estimated four...

A machine with a book value of $32,000 has an estimated four-year life. A proposal is offered to sell the old machine for $10,000 and replace it with a new machine at a cost of $45,000. The new machine has a four-year life with no residual value. The new machine would reduce annual direct labor costs from $33,000 to $22,000. Prepare a differential analysis dated October 7, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

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 Differential Analysis
Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2)
October 7, 2014
Continue with
Old Machine
(Alternative 1) 		Replace Old
Machine
(Alternative 2) 		Differential Effect
on Income
(Alternative 2)
Revenues:
Proceeds from sale of old machine……………….. $    0 $ 10,000 $ 10,000
Costs:
Purchase price ……………………………………….. $    0 –$ 45,000 –$ 45,000
Direct labor (4 years)………………………………… –132,000* –88,000** 44,000
Total costs…………………………………………….. –$132,000 –$133,000 –$ 1,000
Total income (loss)………………………………………. \underline{\underline{–\$ \ 132,000}} \underline{\underline{–\$ \ 123,000}} \underline{\underline{\$ \ 9,000}}
*$33,000 × 4 years
**$22,000 × 4 years

The old machine should be sold and replaced with the new machine

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