Question

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $36,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $46,000. Variable manufacturing costs are $33,800 per year for this machine. Information on two alternative replacement machines follows. Alternative A Alternative B
Cost $ 117,000 $ 116,000
Variable manufacturing costs per year 22,800 10,300
Required:
a. Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.)
b. Calculate the total change in net income if Alternative B is adopted. (Cash outflows should be indicated by a minus sign.)

Answer 1

Answer:

a. The total change in net income if Alternative A is adopted would be -$27,000

b. The total change in net income if Alternative B is adopted is $24,000

Explanation:

a. In order to calculate the total change in net income if Alternative A is adopted we would have to make the following calculation:

total change in net income if Alternative A is adopted=Cost to buy new machine+Cash received to trade in old machine+Reduction in variable manufacturing costs.

Reduction in variable manufacturing costs=($33,800-$22,800)*4

Reduction in variable manufacturing costs=$44,000

total change in net income if Alternative A is adopted=-$ 117,000 + $46,000 + $44,000= -$27,000

The total change in net income if Alternative A is adopted would be -$27,000

b. In order to calculate the total change in net income if Alternative B is adopted we would have to make the following calculation:

total change in net income if Alternative A is adopted=Cost to buy new machine+Cash received to trade in old machine+Reduction in variable manufacturing costs.

Reduction in variable manufacturing costs=($33,800-$10,300)*4

Reduction in variable manufacturing costs=$94,000

total change in net income if Alternative B is adopted=-$ 116,000 + $46,000 + $94,000= $24,000

The total change in net income if Alternative B is adopted is $24,000