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 $37,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $47,000. Variable manufacturing costs are $33,500 per year for this machine Information on two alternative replacement machines follows Cost Variable manufacturing costs per year Alternative A Alternative $112,000 10,800 $119,000 22,100 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 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 INCOME Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase? O Keep the manufacturing machine Alternative A Alternative B

Explanation / Answer

Alternative A:increase or (decrease) in net income cost to buy new machine -119,000 cash received to trade in old machine 47,000 reduction in variable manufacturing costs 45600 total change in net income -26,400 Alternative B:increase or (decrease) in net income cost to buy new machine -112,000 cash received to trade in old machine 47,000 reduction in variable manufacturing costs 90800 total change in net income 25,800 Alternative B

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