Exercise 23-12 Keep or replace LO A1 Xinhong Company is considering replacing on
ID: 2526774 • Letter: E
Question
Exercise 23-12 Keep or replace LO A1
Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $42,000 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 $33,100 per year for this machine. Information on two alternative replacement machines follows.
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?
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.)
Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase?
Alternative A Alternative B Cost $ 117,000 $ 116,000 Variable manufacturing costs per year 22,100 10,700Explanation / Answer
Answers
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine [given]
$ -117,000
$ -116,000
Cash received to trade in old machine [given]
$52,000
$52,000
Reduction in variable manufacturing costs
$55,000 [(33100-22100) x 5 years]
$112,000 [(33100-10700) x 5 years]
Total change in net income
$ -10,000
$48,000
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine [given]
$ -117,000
$ -116,000
Cash received to trade in old machine [given]
$52,000
$52,000
Reduction in variable manufacturing costs
$55,000 [(33100-22100) x 5 years]
$112,000 [(33100-10700) x 5 years]
Total change in net income
$ -10,000
$48,000
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