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 $41,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $51,000. Variable manufacturing costs are $33,700 per year for this machine. Information on two alternative replacement machines follows. Alternative A $122,000 Alternative B $119,000 Cost Variable manufacturing costs per year 22,200 10,100 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 Purchase 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.) ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income

Explanation / Answer

Alternative A:Increase or (decrease in net income) cost to buy new machine -122,000 cash received to trade in old machine 51,000 redution in variable manufacturing costs (33700-22200)*5 57500 total change in net income -13,500 Alternative B:Increase or (decrease in net income) cost to buy new machine -119,000 cash received to trade in old machine 51,000 redution in variable manufacturing costs 118000 total change in net income 50,000 Alternative B

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