Exercise 23 2 Keep or replace LO A1, P1 Xinhong Company is considering replacing one of its manufacturing machines The machine has a book value of $45,000 and a remaining useful life of 5 years, at which time its salvage value will be zero It has a current market value of $52,000 Variable manufacturing costs are $36,000 per year for this machine Information on two alternative replacement machines follows Alternative A Alternative B Cost $ 115,000 $ 125,000 Variable manufacturing costs per year 19,000 15,000 Calculate the total change in net income if Alternative A is adopted (Cash outflows should be indicated by a minus sign ) ALTERNATIVE A INCREASE OR (DECREASE) IN NET INCOME Cost to buy new machine $(115,000) Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income $(115,000) 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 INCOME Cost to buy new machine $(125,000) Cash received to trade in old machine Reduction in variable manufacturing costs Total change in net income $(125,000) Exercise 23 3 Scrap or rework LO A1, P1 A company must decide between scrapping or reworking units that do not pass inspection The company has 22,000 defective units that cost $6 per unit to manufacture The units can be sold as is for $2 50 each, or they can be reworked for $4 50 each and then sold for the full price of $8 50 each If the units are sold as is, the company will be able to build 22,000 units at a cost of $6 each, and sell them at the full price of $8 50 each (1) What is the incremental income from selling the units as scrap and reworking and selling the units Should the company sell the units as scrap or rework them (Deductible amounts should be indicated with a minus sign ) Sell as scrap Rework Sales of scrap units Sales of reworked units Cost to rework units Opportunity cost of not making new units Incremental income (loss) $0 $0 The company should

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Question: Exercise 23-2 Keep or replace LO A1, P1 Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of

Exercise 23-2 Keep or replace LO A1, P1

Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $45,000 and a remaining useful life of 5 years, at which time its salvage value will be zero. It has a current market value of $52,000. Variable manufacturing costs are $36,000 per year for this machine. Information on two alternative replacement machines follows.

Alternative A

Alternative B

Cost

115,000

125,000

Variable manufacturing costs per year

19,000

15,000

Calculate the total change in net income if Alternative A is adopted. (Cash outflows should be indicated by a minus sign.)

ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine	$(115,000)
Cash received to trade in old machine
Reduction in variable manufacturing costs
Total change in net income	$(115,000)

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 INCOME
Cost to buy new machine	$(125,000)
Cash received to trade in old machine
Reduction in variable manufacturing costs
Total change in net income	$(125,000)

Exercise 23-3 Scrap or rework LO A1, P1

A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will be able to build 22,000 units at a cost of $6 each, and sell them at the full price of $8.50 each.

(1)

What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Deductible amounts should be indicated with a minus sign.)

	Sell as scrap	Rework
Sales of scrap units
Sales of reworked units
Cost to rework units
Opportunity cost of not making new units
Incremental income (loss)	$0	$0

The company should:

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