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 four years, at which time its salvage value will be zero. It has a current market value of $50,000. Variable manufacturing costs are $33,700 per year for this machine. Information on two alternative replacement machines follows. Alternative A Alternative B Cost$121,000 $118,000 Variable manufacturing costs per year 22,000 10,800 Calculate the total change in net income if Alternative A, B is adopted. Should Xinhong keep or replace its manufacturing machine

Answer 1

Xinhong Company

Alternative A Alternative B

1. If Alternative 2 is adopted,

the change in net income ($8,550) $3,400

2. Xinhong should replace its manufacturing machine with Alternative B.

Step-by-step explanation:

a) Data and Calculations:

Old Machine Alternatives 2

Alternative A Alternative B

Book value $40,000

Current market value 50,000 $121,000 $118,000

Variable manufacturing cost 33,700 22,000 10,800

Useful life 4 years 4 years 4 years

Straight-line Depreciation exp. 10,000 30,250 29,500

Total annual costs $43,700 $52,250 $40,300

If Alternative 2 is adopted,

the change in net income ($8,550) $3,400

With Alternative A, the change = reduced net income by $8,550 ($52,250 - $43,700)

With Alternative B, the change = increased net income by $3,400 ($43,700 - $40,300)