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 $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.

Alternative A Alternative B Cost $ 119,000 $ 117,000 Variable manufacturing costs per year 22,100 10,200 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 0

Explanation / Answer

Alternative A: Increase or Decrease in Net Income

Cost to buy new Machine

-119000

Cash received to trade in old machine

52000

Reduction in Variable Manufacturing Costs (33100 - 22100)*5

55000

Total Change in Net Income

-12000

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 (33100 - 10200)*5

114500

Total Change in Net Income

49500

Xinhong should Replace its manufacturing Machine and Alternative B is the best course to replace the Manufacturing Machinery.

Alternative A: Increase or Decrease in Net Income

Cost to buy new Machine

-119000

Cash received to trade in old machine

52000

Reduction in Variable Manufacturing Costs (33100 - 22100)*5

55000

Total Change in Net Income

-12000

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