Exercise 10-12 Keep or replace LO A1 Xinhong Company is considering replacing on

Question

Exercise 10-12 Keep or replace LO A1 Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book remaining useful life of 4 years. at which time its salvage value will be zero It has a current market value of $51,000 Variable manufacturing costs are $33.600 per year for this machine. Information on two alternative replacement machines follows value of $41000 and a Cost variab Alternative A $124,8a8 22,400 Alternative B $113,800 te manufacturing costs 18,Ba0 Celculate the total change in net income if Alternative A B is edopted Shourd Xinnong keep orrepiace e machine should be resleced which aiternetve n Complete this question by entering your answers in the tabs below. Puncras the total change in net inmeeeswidis A: ?NCREASE OR ?DECREASEHN NETTI: INCOME

Explanation / Answer

Solution- A and B:

For Aletrnative A and B:

- From above we can form the answer for first 2 questions. Please note Total Change in Net income in alternative B is better. Since, it will save an additional saving as compared to alternative 1.

If the company keeps the machine it will incur variable cost of 33600 for 4 yeeas reaching to total of 134,400.

While if the company sees the equipment and opts for Alternative B- It will spend 10000 cost for 4 years + 113,000 for machine less: sale value of old machine= 102,000.

We observe that Alternative B has total outflow of 102,000 in upcoming 4 years while keeping the old machinery will attract a total cost of 134,400. It is advisable to opt for Alternative B.

Alternative A Alternative B Cost to buy new machine -124,000 Cost to buy new machine -113,000 Cash received to trade in old machine 51000 Cash received to trade in old machine 51000 Reduction in variable manufacturing cost 11200 Reduction in variable manufacturing cost 23600 Total Change in net income -61,800 Total Change in net income -38,400 Reduction in variable manufacturing cost Reduction in variable manufacturing cost Current Variable manufacturing cost 33600 Current Variable manufacturing cost 33600 Alternative A: Variable manufacturing cost 22400 Alternative B: Variable manufacturing cost 10000 Reduction 11200 Reduction 23600

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