Question

Xinhong Company is considering replacing one of its
manufacturing machines. The machine has a book value of $39,000 and
a remaining useful life of four years, at which time its salvage
value will be zero. It has a current market value of $49,000.
Variable manufacturing costs are $33,500 per year for this machine.
Information on two alternative replacement machines
follows.

Alternative A | Alternative B | ||||||

Cost | $ | 118,000 | $ | 112,000 | |||

Variable manufacturing costs per year | 22,800 | 10,400 | |||||

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

1 | ||

ALTERNATIVE A: INCREASE OR (DECREASE) IN NET
INCOME |
||

Cost to buy new machine | (118,000) | |

Cash received to trade in old machine | 49,000 | |

Reduction in variable manufacturing costs | 42,800 | =(33500-22800)*4 |

Total change in net income | (26,200) | |

2 | ||

ALTERNATIVE B: INCREASE OR (DECREASE) IN NET
INCOME |
||

Cost to buy new machine | (112,000) | |

Cash received to trade in old machine | 49,000 | |

Reduction in variable manufacturing costs | 92,400 | =(33500-10400)*4 |

Total change in net income | 29,400 | |

3 | ||

Alternative B should be selected |

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