Xu Company is considering replacing one of its manufacturing machines. The machi
ID: 2371664 • Letter: X
Question
Xu Company is considering replacing one of its manufacturing machines. The machine has a book value of $44,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $54,000. Variable manufacturing costs are $33,700 per year for this machine. Information on two alternative replacement machines follows.
Calculate the total change in net income if Alternative A is adopted. (Input all amounts as positive values, except cash outflows and any negative total change in net income which should be indicated by a minus sign. Omit the "$" 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.)
Should Xu keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xu purchase?
Xu Company is considering replacing one of its manufacturing machines. The machine has a book value of $44,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $54,000. Variable manufacturing costs are $33,700 per year for this machine. Information on two alternative replacement machines follows.
Explanation / Answer
Hi,
Please find the answer as follows:
Part B:
Yes, XU can replace the old machine with Alternative B as it is resulting in an Incremental Revenue of 28000.
Thanks.
Cost to Buy New Machine -117000 Cash received to trade in old machine 54000 Reduction in Variable Manufacturing Costs (33700*4 - 22700*4) 44000 Total Increase/Decrease in Net Income -19000
Alternative B
Cost to Buy New Machine -118000 Cash received to trade in old machine 54000 Reduction in Variable Manufacturing Costs (33700*4 - 10700*4) 92000 Total Increase/Decrease in Net Income 28000
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