Question

10-12

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 5 years, at which time its salvage value will be zero. It has a current market value of $49,000. Variable manufacturing costs are $33,800 per year for this machine. Information on two alternative replacement machines follows. Alternative A $123,000 Alternative B $110,000 Cost Variable manufacturing costs per year 22,100 10,100 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?

Answer 1

ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine	$   (1,23,000.00)
Cash received to trade in old machine	$         49,000.00
Reduction in variable manufacturing costs	$         58,500.00
Total change in net income	$      (15,500.00)

ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine	$   (1,10,000.00)
Cash received to trade in old machine	$         49,000.00
Reduction in variable manufacturing costs	$     1,18,500.00
Total change in net income	$         57,500.00

Which option should be accepted=== Alternative B

Alternative B will increase income by $57,500