Question

Exercise 23-10 Keep or replace LO P5Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $35,000 and a remaining useful life of four years, at which time its salvage value will be zero. It has a current market value of $45,000. Variable manufacturing costs are $33,800 per year for this machine. Information on two alternative replacement machines follows. Alternative A Alternative BCost$124,000 $115,000 Variable manufacturing costs per year 22,100 10,700 Calculate the total change in net income if Alternative A, B is adopted. Should Xinhong keep or replace its manufacturing machine

Answer 1

Answer:

Xinhong should replace its manufacturing machine

Explanation:

                 Xinhong Company Alternative A

                Increase or decrease in net income

Particulars                                                          Amount

Cost to buy new machine                              -$124,000.00

Cash received to trade in old machine          $45,000.00

Reduction in variable manufacturing cost     $46,800.00

($33,800 - $22,100)*4

Total change in net income                           -$32,200.00

                   Xinhong Company Alternative B

                 Increase or decrease in net income

Particulars                                                          Amount

Cost to buy new machine                               -$115,000.00

Cash received to trade in old machine           $45,000.00

Reduction in variable manufacturing cost      $92,400.00

($33,800 - $10,700)*4

Total change in net income                            $22,400.00

Conclusion: Xinhong should replace the existing machine as incremental net income is high for the alternative.