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Plymouth Company owns equipment with a cost of $600,000 and accumulated depreciation of $375,000 that can be sold for $300,000, less a 4% sales commission. Alternatively, Plymouth Company can lease the equipment for four years for a total of $320,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Plymouth Company on the equipment would total $40,000 over the four-year lease.
A. Prepare a differential analysis on August 7 as to whether Plymouth Company should lease (Alternative 1) or sell (Alternative 2) the equipment.
B. Should Plymouth Company lease (Alternative 1) or sell (Alternative 2) the equipment?

Sagot :

Answer:

A. We have:

Profit from Lease Equipment (Alternative 1) = $280,000

Profit from Sell Equipment (Alternative 2) = $288,000

Differential Effects = Net gain from selling = $8,000

B. Since the net gain from selling is $8,000, Plymouth Company should sell (Alternative 2) the equipment.

Explanation:

A. Prepare a differential analysis on August 7 as to whether Plymouth Company should lease (Alternative 1) or sell (Alternative 2) the equipment.

Note: See the attached excel file for the differential analysis.

In the attached excel file, the following calculation is made:

Cost of Sell Equipment (Alternative 2) = Sales commission = Revenue * Sales commission percentage = $300,000 * 4% = $12,000

From attached excel file, we have:

Profit from Lease Equipment (Alternative 1) = $280,000

Profit from Sell Equipment (Alternative 2) = $288,000

Differential Effects = Net gain from selling = $8,000

B. Should Plymouth Company lease (Alternative 1) or sell (Alternative 2) the equipment?

Since the net gain from selling is $8,000, Plymouth Company should sell (Alternative 2) the equipment.

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