Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $37,000 and a remaining useful life of four years, at which time its salvage value will be zero. It has a current market value of $47,000. Variable manufacturing costs are $33,700 per year for this machine. Information on two alternative replacement machines follows.

Alternative A Alternative B
Cost $ 123,000 $ 113,000
Variable manufacturing costs per year 22,700 10,000
1. Calculate the total change in net income if Alternative A is adopted.
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 $0
2. Calculate the total change in net income if Alternative B is adopted. (Cash outflows should be indicated by a minus sign.)
ALTERNATIVE B: 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 $0
3. Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase?
(a) Keep the manufacturing machine.
(b) Alternative A.
(c) Alternative B.

Answer 1

1.$32,000

2.$28,800

3. Alternative A should be selected

Step-by-step explanation:

Xinhong Company

1.Calculation of the total change in net income if Alternative A is adopted

ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME

Cost to buy new machine (123,000)

Cash received to trade in old machine 47,000

Reduction in variable manufacturing costs 44,000

[(33,700-22,700)*4]

Total change in net income (32,000)

2.Calculation of the total change in net income if Alternative B is adopted

ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME

Cost to buy new machine (113,000)

Cash received to trade in old machine 47,000

Reduction in variable manufacturing costs 94,800

[(33,700-10,000)*4]

Total change in net income 28,800

3.Alternative A should be selected by Xinhong because it has a higher amount of $32,000 than Alternative B which has a lower amount of $28,800