A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500 and replace it with a new machine at a cost of $75,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $11,200 to $7,400. Prepare a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)

Company should continue with old machine (Alternative 1)

Explanation:

Preparation of a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2)

DIFFERENTIAL ANALYSIS

Continue with old machine(Alternative 1) ;Replace with old machine(Alternative 2);Differential effect on income

REVENUES

Proceeds from sale of machine

$0 $50500$50500

COSTS

Purchase price$0-$75000-$75000

Direct labor-$56000-$3700019000

(11200*5 = -56000)

(7400*5 = -37000)

Income (loss)-$56000-$61500-$5500

Based on the above differential analysis the Company should continue with OLD MACHINE (Alternative 1)

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is this good enough?