Answer:
Continue with old machine
Explanation:
Differential Analysis
Continue with Old Machine (Alt.1)or Replace Old Machine (Alt.2
May-04
Continue with Old Replace Old Diff. effects Machine (Alt. 1) Machine (Alt.2) (Alt. 2)
Revenues:
Sale ( 5 years) 803,500 803,500 0
Costs:
Purchase price 0 -105,500 105,500
Direct materials -274,000 -274,000 0
( 5 years)
Direct labor -190,000 0 -190,000
( 5 years)
Power and -17,500 -94,000 76,500
maintenance
Taxes, insurance -6,500 -21,000 14,500
etc ( 5 years)
Selling and -190,000 -190,000 0
administrative
expense ( 5 years)
Total expenses -678,000 -684,500 6,500
Profit (Loss) $125,500 $119,000 $6,500
Hence it is advantageous to continue with old machine. Net incremental advantage of continuing with old machine = $6,500
