Exercise 23-2 Keep or replace LO A1, P1 Xinhong Company is considering replacing
ID: 2487602 • Letter: E
Question
Exercise 23-2 Keep or replace LO A1, P1
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 5 years, at which time its salvage value will be zero. It has a current market value of $52,000. Variable manufacturing costs are $36,000 per year for this machine. Information on two alternative replacement machines follows.
Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.)
Calculate the total change in net income if Alternative B is adopted. (Cash outflows should be indicated by a minus sign.)
Exercise 23-3 Scrap or rework LO A1, P1
A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will be able to build 22,000 units at a cost of $6 each, and sell them at the full price of $8.50 each.
What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Deductible amounts should be indicated with a minus sign.)
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 5 years, at which time its salvage value will be zero. It has a current market value of $52,000. Variable manufacturing costs are $36,000 per year for this machine. Information on two alternative replacement machines follows.
Explanation / Answer
1.
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine
-$ 115,000
Cash received to trade in old machine
$ 52,000
Reduction in variable manufacturing costs
($36,000 - $19,000) * 5 years
$ 85,000
Total change in net income
$ 22,000
ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine
-$ 125,000
Cash received to trade in old machine
$ 52,000
Reduction in variable manufacturing costs
($36,000 - $15,000) * 5 years
$ 105,000
Total change in net income
$ 32,000
2.
Sell as scrap
Rework
Sales of scrap units
$2.50 * 22,000
$55,000
Sales of reworked units
$8.50*22,000
$ 187,000.00
Cost to rework units
$4.50*22,000
-$ 99,000.00
Opportunity cost of not making new units
($8.50-$6)*22,000
-$ 55,000.00
Incremental income (loss)
$ 55,000
$ 33,000.00
The company should sell he defective units as scrap as it is.
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine
-$ 115,000
Cash received to trade in old machine
$ 52,000
Reduction in variable manufacturing costs
($36,000 - $19,000) * 5 years
$ 85,000
Total change in net income
$ 22,000
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