Question

Differential Analysis for a Lease-or-Sell Decision Sure-Bilt Construction Company is considering selling excess machinery with a book value of $276,600 (original cost of $398,200 less accumulated depreciation of $121,600) for $276,600, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $284,400 for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $24,500. a. Prepare a differential analysis, dated May 25 to determine whether Sure-Bilt should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) May 25 Lease Machinery (Alternative 1) Sell Machinery (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ $ $ Costs Income (Loss) $ $ $ b. On the basis of the data presented, would it be advisable to lease or sell the machinery

Answer 1

Answer:

A. $2,870

B. It would be advisable to sell the machinery

Explanation:

a. Preparation of a differential analysis, to determine whether Sure-Bilt should lease (Alternative 1) or sell (Alternative 2) the machinery

DIFFERENTIAL ANALYSIS

Lease (Alternative 1) or sell (Alternative 2) the machinery May 25

Lease machinery (Alternative 1)

Revenue $284,400

Cost $24,500

Income/loss$259,900

Sell machinery (Alternative 2)

Revenue $276,600

Cost $13,830 (5%*276,600)

Income/loss $262,770

Differential effect on income (Alternative 2)

Revenue ($284,400-$276,600)=$7,800

Cost ($24,500-$13,830)=$10,670

Income/loss($259,900-$262,770)=$2,870

b. On the basis of the data presented above , it would be advisable sell the machinery and the benefit from selling the machinery will be the amount of $2,870