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 \$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?

 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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