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Xu Company is considering replacing one of its manufacturing machines. The machine has a book value of $44,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $54,000. Variable manufacturing costs are $33,700 per year for this machine. Information on two alternative replacement machines follows. |
| Alternative A | Alternative B | |||||
| Cost | $ | 117,000 | $ | 118,000 | ||
| Variable manufacturing costs per year | 22,700 | 10,700 | ||||
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Calculate the total change in net income if Alternative A is adopted. (Input all amounts as positive values, except cash outflows and any negative total change in net income which should be indicated by a minus sign. Omit the “$” sign in your response.) |
| Alternative A: Increase or (Decrease) in Net Income | |
| Cost to buy new machine | $ |
| Cash received to trade in old machine | |
| Reduction in variable manufacturing costs | |
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| Total change in net income | $ |
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Calculate the total change in net income if Alternative B is adopted. (Input all amounts as positive values, except cash outflows and any negative total change in net income which should be indicated by a minus sign. Omit the “$” sign in your response.) |
| Alternative B: Increase or (Decrease) in Net Income | |
| Cost to buy new machine | $ |
| Cash received to trade in old machine | |
| Reduction in variable manufacturing costs | |
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| Total change in net income | $ |
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Should Xu keep or replace its manufacturing machine? If the machine should be replaced, which alternative new machine should Xu purchase? |
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