Answer:
Calculate the total change in net income if Alternative A, B is adopted.
If alternative A is adopted, the total change in net income will be:
Given:
Cost of new machine = $117,000
Market value of old machine = $48,000
Variable manufacturing cost savings = ($34,000 - $22,300)*5years
= $58,500
The total change in net income=
(market value of old machine+ savings on variable manufacturing costs - cost of new machine)
= $48,000 + $58,500 - $117,000
= - $10,500
The total change in net income if Alternative A is adopted is $10,500.
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If alternative B is adopted, the total change in net income will be:
Given:
Cost of new machine = $119,000
Market value of old machine = $48,000
Variable manufacturing cost savings = ($34,000 -$10100)*5years
= $119,500
The total change in net income=
(market value of old machine+ savings on variable manufacturing costs - cost of new machine)
=$48,000 + $119,500 - $119,000
= $48,500
The total change in net income if Alternative B is adopted is $48,500
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From the calculation, we could see net income for alternative B is higher and it is also positive, compared to alternative A which is a negative and lower.
Therefore, if the machine should be replaced, alternative B should be usrd
