Lexigraphic Printing Company is considering replacing a machine that has been used in its factory for four 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:
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Old Machine
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Cost of machine, 10-year life
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$89,000
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Annual depreciation (straight-line)
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8,900
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Annual manufacturing costs, excluding depreciation
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23,600
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Annual non-manufacturing operating expenses
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6,100
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Annual revenue
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74,200
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Current estimated selling price of machine
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29,700
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New Machine
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Purchase price of machine, six-year life
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$119,700
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Annual depreciation (straight-line)
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19,950
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Estimated annual manufacturing costs, excluding depreciation
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6,900
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Annual non-manufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.
Required:
1. Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required
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Differential Analysis
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Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2)
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April 30
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1
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Continue with Old Machine
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Replace Old Machine
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Differential Effect on Income
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2
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(Alternative 1)
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(Alternative 2)
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(Alternative 2)
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3
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4
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5
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6
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7
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8
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2. Choices of what other factors should be considered
Was the purchase price of the old machine too high?
What effect does the federal income tax have on the decision?
What opportunities are available for the use of the $90,000 of funds ($119,700 less $29,700 proceeds from the old machine) that are required to purchase the new machine?
Should management have purchased a different model of the old machine?
Are there any improvements in the quality of work turned out by the new machine?