Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $45,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $52,000. Variable manufacturing costs are $36,000 per year for this machine. Information on two alternative replacement machines follows.

Alternative A Alternative B
$115,000 $125,000
Cost
Variable manufacturing 19,000 15,000
costs per year



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?

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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 -

Cash received to trade in old machine -

Reduction in variable manufacturing costs -

Total change in net income -

Answer 1

1. Cost to buy new machine: Alternative A has a cost of $115,000. This would be a cash outflow for Xinhong Company.

2. Cash received to trade in old machine: Since there is no mention of a trade-in option for Alternative A, we assume there is no cash received from trading in the old machine.

3. Reduction in variable manufacturing costs: The current machine has variable manufacturing costs of $36,000 per year. With Alternative A, the variable manufacturing costs are reduced to $19,000 per year. This reduction in costs would positively impact net income.

To calculate the total change in net income, we subtract the cost to buy the new machine and add the reduction in variable manufacturing costs:

Total change in net income = Cost to buy new machine - Reduction in variable manufacturing costs

Total change in net income = -$115,000 - (-$36,000 - $19,000)

Simplifying the equation:

Total change in net income = -$115,000 - (-$17,000)

Total change in net income = -$115,000 + $17,000

Total change in net income = -$98,000

Therefore, if Alternative A is adopted, Xinhong Company can expect a decrease in net income of $98,000.