Lexigraphic 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 $89,000 Annual depreciation (straight-line) 8,900 Annual manufacturing costs, excluding depreciation 23,600 Annual non-manufacturing operating expenses 6,100 Annual revenue 74,200 Current estimated selling price of machine 29,700 New Machine Purchase price of machine, six-year life $119,700 Annual depreciation (straight-line) 19,950 Estimated annual manufacturing costs, excluding depreciation 6,900 Annual non-manufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine. Required: 1. Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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Old Machine
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| Cost of machine, 10-year life | $89,000 |
| Annual depreciation (straight-line) | 8,900 |
| Annual |
23,600 |
| Annual non-manufacturing operating expenses | 6,100 |
| Annual revenue | 74,200 |
| Current estimated selling price of machine | 29,700 |
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New Machine
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| Purchase price of machine, six-year life | $119,700 |
| Annual depreciation (straight-line) | 19,950 |
| Estimated annual manufacturing costs, excluding depreciation | 6,900 |
| Required: | |
| 1. |
Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
2. List other factors that should be considered before a final decision is reached. Check all that apply.
Check all that apply.
What effect does the federal income tax have on the decision?
Was the purchase price of the old machine too high?
Should management have purchased a different model of the old machine?
Are there any improvements in the quality of work turned out by the new machine?
What opportunities are available for the use of the $90,000 of funds ($119,700 less $29,700 proceeds from the old machine) that are required to purchase the new machine?
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