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Various questions on Differential Analysis

Exercise 12-1

Miller Construction Company is considering selling excess machinery with a book value of $250,000 (original cost of $375,000 less accumulated depreciation of...
a) Prepare a differential analysis report, dated January 3, 2006, for the lease or sell decision.

Please see attached.

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The answers are in the attached file

12-1
a.
Proposal to Lease or Sell Machinery
January 3, 2006
Differential revenue from alternatives:
Revenue from lease................................................................. $ 234,000
Proceeds from sale.................................................................. 220,000
Differential revenue from lease...................................................... $14,000
Differential cost of alternatives:
Repair, insurance, and property tax expenses................ $ 23,000
Commission on sale................................................................ 11,000 (5% of 220000)
Differential cost of lease..................................................................... 12,000
Net differential income from lease alternative....................................... $ 2,000

b. Lease the machinery. The net gain from leasing is $2,000.

12-2
a.
Proposal to Discontinue Diet Kola
January 3, 2006

Differential revenue from annual sales of Diet Kola:
Revenue from sales............................................. $ 350,000
Differential cost of annual sales of Diet Kola:
Variable cost of goods sold............................... $180,000*
Variable operating expenses.................... ........ 105,000** 285,000
Annual differential income from sales of Diet Kola.... $ 65,000
* 225,000 × 80% ** 140,000 × 75%
Since the fixed costs will not change, we only need to consider the variable costs

b. Diet Kola should be retained. As indicated by the differential analysis in (a), the income would ...

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The solution has various questions relating to differential analysis

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