Bay Area Electronics Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $140,000, the accumulated depreciation is $110,000, its remaining useful life is 15 years, and its salvage value is negligible. On January 20, 2008, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that will cost $270,000. The automatic machine has an estimated useful life of 15 years and no significant salvage value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:
|
|
Present |
Proposed |
|
|
Operations |
Operations |
|
Sales |
$275,000 |
$275,000 |
|
Direct materials |
$ 80,000 |
$ 80,000 |
|
Direct labor |
45,000 |
— |
|
Power and maintenance |
7,500 |
32,000 |
|
Taxes, insurance, etc. |
3,500 |
8,500 |
|
Selling and administrative expenses |
80,000 |
80,000 |
|
Total expenses |
$216,000 |
$200,500 |
a. Prepare a differential analysis report for the proposal to replace the machine. Include in the analysis both the net differential change in costs anticipated over the 15 years and the net annual differential change in costs anticipated.
b. Based only on the data presented, should the proposal be accepted?
c. What are some of the other factors that should be considered before a final decision is made?