Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $38,000 and a remaining useful life of five years, at which time its salvage value will be zero. It has a current market value of $48,000. Variable manufacturing costs are $34,000 per year for this machine. Information on two alternative replacement machines follows. Alternative A Alternative B Cost $ 117,000 $ 119,000 Variable manufacturing costs per year 22,300 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

Calculate the total change in net income if Alternative A, B is adopted.

If alternative A is adopted, the total change in net income will be:

Given:

Cost of new machine = $117,000

Market value of old machine = $48,000

Variable manufacturing cost savings = ($34,000 - $22,300)*5years

= $58,500

The total change in net income=

(market value of old machine+ savings on variable manufacturing costs - cost of new machine)

= $48,000 + $58,500 - $117,000

= - $10,500

The total change in net income if Alternative A is adopted is $10,500.

__________________________

If alternative B is adopted, the total change in net income will be:

Given:

Cost of new machine = $119,000

Market value of old machine = $48,000

Variable manufacturing cost savings = ($34,000 -$10100)*5years

= $119,500

The total change in net income=

(market value of old machine+ savings on variable manufacturing costs - cost of new machine)

=$48,000 + $119,500 - $119,000

= $48,500

The total change in net income if Alternative B is adopted is $48,500

__________________________

From the calculation, we could see net income for alternative B is higher and it is also positive, compared to alternative A which is a negative and lower.

Therefore, if the machine should be replaced, alternative B should be usrd