Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $41,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $51,000. Variable manufacturing costs are $33,300 per year for this machine. Information on two alternative replacement machines follows.

Alternative A Alternative B
Cost $ 121,000 $ 117,000
Variable manufacturing costs per year 22,600 10,800
Required:
(a) 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

Calculate the total change in net income if Alternative A, B is adopted. Should Xinhong keep or replace its manufacturing machine?

• Alternative A results in a net decrease of profits, $16,500 in 5 years, or $3,300 per year.
• Alternative B results in a net increase of profits, $46,500 in 5 years, or $9,300 per year.

If the machine should be replaced, which alternative new machine should Xinhong purchase?

• The company should choose alternative B.

Step-by-step explanation:

there are 3 alternatives to choose from:

Alternative A:

cost of the machine = $121,000

- sale value of old machine = ($51,000)

- reduction of variable costs = ($53,500)

[($33,300 - $22,600) x 5]

total increase in costs $16,500

Alternative B:

cost of the machine = $117,000

- sale value of old machine = ($51,000)

- reduction of variable costs = ($112,500)

[($33,300 - $10,800) x 5]

total increase in costs ($46,500)

Alternative C:

costs do not change

Alternative A results in a net decrease of profits, $16,500 in 5 years, or $3,300 per year.

Alternative B results in a net increase of profits, $46,500 in 5 years, or $9,300 per year.

The company should choose alternative B.

Answer 2

Alternative B should be selected.

Step-by-step explanation:

Alternative A:

Cost to buy new machine (121,000)

Cash received to trade in old machine 51,000

Reduction in variable manufacturing costs 53,500 =(33300-22600)*5

Total change in net income (16,500)

Alternative B

Cost to buy new machine (117,000)

Cash received to trade in old machine 51,000

Reduction in variable manufacturing costs 112,500 =(33300-10800)*5

Total change in net income 46,500

Since the benefit provided by Alternative B is higher than the Alternative A, alternative B should be selected.