Xu Company is considering replacing one of its manufacturing machines. The machi
ID: 2347585 • Letter: X
Question
Xu Company is considering replacing one of its manufacturing machines. The machine has a book value of $45,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $55,000. Variable manufacturing costs are $34,000 per year for this machine. Information on two alternative replacement machines follows.
Calculate the total change in net income if Alternative A is adopted.(Input all amounts as positive values, except cash outflows and any negative total change in net income which should be indicated by a minus sign.Omit the "$" sign in your response.)
Calculate the total change in net income if Alternative B is adopted.(Input all amounts as positive values, except cash outflows and any negative total change in net income which should be indicated by a minus sign. Omit the "$" sign in your response.)
Xu Company is considering replacing one of its manufacturing machines. The machine has a book value of $45,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $55,000. Variable manufacturing costs are $34,000 per year for this machine. Information on two alternative replacement machines follows.
Explanation / Answer
Alternative A : Increase or (Decrease) in Net Income
Cost to buy new machine -$115,000
Cash received to trade in old machine $55,000
Reduction in variable manufacturing costs $48,000 ($34,000 - $22,000) x 4 years
Total change in net income -$12,000
Alternative B : Increase or (Decrease) in Net Income
Cost to buy new machine -$125,000
Cash received to trade in old machine $55,000
Reduction in variable manufacturing costs $88,000 ($34,000 - $12,000) x 4 years
Total change in net income $18,000
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