Problem - Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $60,000; the accumulated depreciation is $24,000; its remaining life is five years; and its residual value is zero. 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 $180,000. 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
Operation
|
Proposed
Operation
|
|
Sales
|
$205,000
|
$205,000
|
|
Direct materials
|
$72,000
|
$72,000
|
|
Direct labor
|
$51,000
|
-
|
|
Power and maintenance
|
$5,000
|
$18,000
|
|
Taxes, insurance, etc.
|
$1,500
|
$4,000
|
|
Selling and administrative
|
$45,000
|
$45,000
|
|
Total expenses
|
$174,500
|
$139,000
|
1. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1), or replace it with the new machine (Alternative 2). Prepare the analysis over the useful life of the new machine.
2. Based only on the data presented, should the proposal be accepted?
3. What other factors should be considered before a final decision is made?
Your paper should meet the following requirements: Be 2-4 pages in length, not counting the required title and reference pages. Your paper should include an introduction, a body with at least two fully developed paragraphs, and a conclusion.