Problem - Flint tooling company is considering replacing a machine that has been used in its factory for two 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 eight year life $48,000
Annual depreciation (straight line) 6,000
Annual manufacturing cost, excluding depreciation 14,500
Annual nonmanufacturing operating expenses 2,900
Annual revenue 29,600
Current estimated selling price of the machine 18,000
New Machine:
Cost of machine, six year life %58,500
Annual depreciation (straight-line) 9,750
Estimated annual manufacturing costs, exclusive of depreciation 5,200
Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine:
1. Prepare a differential analysis report as of May 22, 2010 comparing operations utilizing the new machine with operations using the present equipment. The anaylsis should indicate the differential income that would result over the six year period if the new machine is acquired.
2. List other factors that should be considered before a final decision is reached.