Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $39,000 and a remaining useful life of five years, at which time its salvage value will be zero. It has a current market value of $49,000. Variable manufacturing costs are $33,600 per year for this machine. Information on two alternative replacement machines follows. Cost Variable manufacturing costs per year Alternative A $121,000 22,700 Alternative B $115,000 10,300 Calculate the total change in net income if Alternative A, B is adopted. 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. Alternative A Alternative B Xinhong Purchase Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.) ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine $ (121,000) Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income $ (121,000)

Answer 1

1
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine	(121,000)
Cash received to trade in old machine	49,000
Reduction in variable manufacturing costs	54,500	=(33600-22700)*5
Total change in net income	(17,500)
2
ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine	(115,000)
Cash received to trade in old machine	49,000
Reduction in variable manufacturing costs	116,500	=(33600-10300)*5
Total change in net income	50,500
3
Alternative B should be selected