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 $39,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of 549,000. Variable manufacturing costs are $33,500 per year for this machine. Information on two alternative replacement machines follows. Alternative A Alternative B S 124.000 5 111,000 10,500 Cost g costs per year 22,900 Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.) ALTERNATIVE A: INCREASE OR (DECREASE) IN NE Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income INCOME Calculate the total change in net income if Alternative B is adopted. (Cash outflows should be indicated by a minus sign.) ALTERNATIVE B: INCREASE OR (DECREASE) IN N Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income INCOME Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase? O Keep the manufacturing machine O Alternative A O Alternative B

Explanation / Answer

ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine ($124,000) Cash received to trade in old machine 49,000 Reduction in variable manufacturing costs 53,000 Total change in net income ($22,000) ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine ($111,000) Cash received to trade in old machine 49,000 Reduction in variable manufacturing costs 115,000 Total change in net income $53,000 Alternative B should be selected

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