Xinhong Company is considering replacing one of its manufacturing machines. The

Question

Xinhong 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 $33,200 per year for this machine. Information on two alternative replacement machines follows. Alternative A Alternative B Cost Variable manufacturing costs per year $121,e00 22,888 $115,e00 10,688 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? Complete this question by entering your answers in the tabs below Xinhong Alternative A Alternative B Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.) NATIVE A: INCREASE OR (DECREASE) IN N INCOME Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income Alternative A Alternative B >

Explanation / Answer

Solution:

As net income will increase by $30,400 in alternative B, therefore Xinhon should choose alternative B.

Alternative A: Increase or decrease in net income - Xinhong Company Particulars Amount Cost to buy new machine -$121,000.00 Cash received to trade in old machine $55,000.00 Reduction in variable manufacturing cost ($33200 - $22,800)*4 $41,600.00 Total change in net income -$24,400.00

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