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 $44,000 and a remaining useful life of 4 years, at which time tssalvage value will be zero. It has a current market value of $54,000. Variable manufacturing costs are $33,100 per year for this machine Information on two alternative replacement machines follows. Cost Variable manufacturing costs per year Alternative A $118,000 22,300 Alternative B $117,000 10,200 Calculate the total change in net income if Altenative A is adopted. (Cash outflows should be indicated by a minus sign.) ALTERNATIVE A: INCREASE OR (DECREASE) IN NE INCOME Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net 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 NET Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income INCOME

Explanation / Answer

ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine -118000 Cash received to trade in old machine 54,000 Reduction in variable manufacturing costs 43,200 Total change in net income -20800 ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine -117000 Cash received to trade in old machine 54,000 Reduction in variable manufacturing costs 91,600 Total change in net income 28600

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