25.00 points Xinhong Company is considering replacing one of its manufacturing m

Question

25.00 points Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $35,000 and a remaining useful life of S years, at which time its salvage value will be zero. It has a current market value of S45,000. Variable manufacturing costs are $33,200 per year for this machine. Information on two alternative replacement machines follows. Altemative A Alternative B $119,000 119,000 Cost Variable manufacturing costs per year 22,500 10,400 Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicatecd by a minus sign.) ALTERNATIVE A: 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 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 cld machine Reduction in variable manufacturing costs Total change in net income INCOME Should Xinhong keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xinhong purchase? Keep the manufacturing machine Atemative A Altermative 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

$                   45,000

Reduction in variable manufacturing cost

$                   53,500

Total change in net income

$                (20,500)

Reduction in variable manufacturing cost = ($ 33,200 - $ 22,500) x 5 = $ 10,700 x 5 = $ 53,500

ALTERNATIVE B:INCREASE (OR DECREASE) IN NET INCOME

Cost to buy new machine

$              (119,000)

Cash received to trade in old machine

$                   45,000

Reduction in variable manufacturing cost

$                114,000

Total change in net income

$                   40,000

Reduction in variable manufacturing cost = ($ 33,200 - $ 22,800) x 5 = $ 10,700 x 5 = $ 114,000

Xinhong should replace the machine with alternative B.

ALTERNATIVE A:INCREASE (OR DECREASE) IN NET INCOME

Cost to buy new machine

$              (119,000)

Cash received to trade in old machine

$                   45,000

Reduction in variable manufacturing cost

$                   53,500

Total change in net income

$                (20,500)

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