Practice differential analysis kim kwon digital components
Managerial Accounting
Practice Differential Analysis
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
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.
Based only on the data presented, should the proposal be accepted?
What other factors should be considered before a final decision is made?
