Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $43,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $53,000. Variable manufacturing costs are $33,500 per year for this machine. Information on two alternative replacement machines follows.

Alternative A Alternative BCost $115,000 $125,000VMC per year 19,000 15,000Should Xinhong keep or replace its manufacturing machine?If the machine should be replaced, which alternative new machine should Xinhong purchase?

Answer 1

Yes, Xinhong replace its manufacturing machine i.e Alternative A because it have negative effect on the net income. So, Alternative B should be purchased and Alternative A should be replaced.

Step-by-step explanation:

For calculating which machine should be replaced, first we have to compute the net effect of both machines individually.

Alternative A:

The net effect should be calculated by applying an equation which is shown below:

= current market value + difference of variable manufacturing cost - Cost of machine

where,

cost of machine is $115,000

Current market value is $53,000

And, difference of variable cost is

= (variable manufacturing costs - Alternative A variable cost) × number of years

= ($33,500 - $19,000) × 4

= $58,000

Now, apply these values to the above equation

So, the net effect is equals to

= ( $53,000 + $58,000 - $115,000 )

= -$4,000

Alternative B:

The net effect should be calculated by applying an equation which is shown below:

= current market value + difference of variable manufacturing cost - Cost of machine

where,

cost of machine is $125,000

Current market value is $53,000

And, difference of variable cost is

= (variable manufacturing costs - Alternative A variable cost) × number of years

= ($33,500 - $15,000) × 4

= $74,000

Now, apply these values to the above equation

So, the net effect is equals to

= ( $53,000 + $74,000 - $125,000 )

= $2,000

After calculations, we get to know that Alternative B has positive amount which reflect the better profits and better returns in the future.

Yes, Xinhong replace its manufacturing machine i.e Alternative A because it have negative effect on the net income. So, Alternative B should be purchased and Alternative A should be replaced.