Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $40,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $50,000. Variable manufacturing costs are $33,900 per year for this machine. Information on two alternative replacement machines follows. Alternative B Alternative A Cost $124,000 22,300 $112,000 Variable manufacturing costs per year 10,100 1. Calculate the total change in net income if Alternative A and B is adopted 2. Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase? Complete this question by entering your answers in the tabs below Required 1 Required 2 Calculate the total change in net income if Alternative A and B is adopted. (Cash outflows should be indicated by a minus sign.) INCREASE OR (DECREASE) IN NET INCOME ALTERNATIVE A: ALTERNATIVE B: Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs 0$ Total change in net income

Answer 1

1
INCREASE OR (DECREASE) IN NET INCOME
	ALTERNATIVE A	ALTERNATIVE B
Cost to buy new machine	(124,000)	(112,000)
Cash received to trade in old machine	50,000	50,000
Reduction in variable manufacturing costs	58,000	119,000
Total change in net income	(16,000)	57,000
2
Replace the manufacturing machine. Alternative B new machine should be purchased.
Workings:
	ALTERNATIVE A	ALTERNATIVE B
Reduction in variable manufacturing costs	=(33900-22300)*5	=(33900-10100)*5