Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value...

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $43,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $53,000. Variable manufacturing costs are $33,700 per year for this machine. Information on two alternative replacement machines follows.

Alternative A Alternative B
Cost $ 116,000 $ 114,000
Variable manufacturing costs per year 22,700 10,800


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?

Homework Answers

Answer #1

Solution

Xinhong Company

Calculation of total change in net income if Alternative A is adopted:

Alternative A -

Cost to buy new machine

($116,000)

cash proceeds from old machine

$53,000

Savings in variable manufacturing costs

$55,000

(33,700 - 22,700) x 5 years

Total change in net income

($8,000)

Calculation of total change in net income if Alternative B is adopted:

Alternative A -

Cost to buy new machine

($114,000)

cash proceeds from old machine

$53,000

Savings in variable manufacturing costs

$114,500

(33,700 - 10,800) x 5 years

Total change in net income

$53,500

The above two calculations indicate that the total change in net income for Alternative B is positive and higher compared to Alternative A. Hence, Xinhong should choose Alternative B - Replace the existing machine with Alternative B.

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