Exercise 1O-12 Keep or replace LO A1 Xinhong Company is considering replacing on

Question

Exercise 1O-12 Keep or replace LO A1 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 5 years, at which time its salvage value will be zero. It has a current market value of $47000. Variable manufacturing costs are $33,400 per year for this machine. Information on two alternative replacement machines follows Alternative A Alternative B Cost Variable manufacturing costs per year $121,000 22,100 $113,000 10,800 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 ernative A Alternative B Xinhong Calculate the total change in net income if Alternative A is adopted. (Cash outflows s hould be indicated by a minus sign.) Cost to buy new machine Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income Alternative B

Explanation / Answer

Alternative A

Alternative B

Xinhong should choose Alternative B.

Cost to buy new machine $-121000 Cash received to trade in old machine 47000 Reduction in variable manufacturing costs [(33400-22100) x 5] 56500 Total change in net income $-17500

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