Xinhong Company is considering replacing one of its manufacturing machines. The
ID: 2566718 • Letter: X
Question
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 $33,700 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?
$0
Alternative A Alternative B Cost $ 122,000 $ 117,000 Variable manufacturing costs per year 22,900 10,400Explanation / Answer
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine -122000 Cash received to trade in old machine 52000 Reduction in variable manufacturing costs (33700-22900)*5) 54000 Total change in net income -16000 ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine -117000 Cash received to trade in old machine 52000 Reduction in variable manufacturing costs (33700-10400)*5) 116500 Total change in net income 51500 It is suggested to replace the machine with Alternative B, Because it increases the net income by $51500 during the 5 years Note: Discount factor does not used due to lack of information
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