Xinhong company is considering replacing one of its manufacturing machines. the machine has a book value of $43,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. it has a current market value of $53,000. variable manufacturing costs are $33,500 per year for this machine. information on two alternative replacement machines follows.
alternative a alternative bcost $115,000 $125,000vmc per year 19,000 15,000should xinhong keep or replace its manufacturing machine? if the machine should be replaced, which alternative new machine should xinhong purchase?

Yes, Xinhong  replace its manufacturing machine i.e Alternative A because it have negative effect on the net income. So, Alternative B should be purchased and Alternative A should be replaced.

Explanation:

For calculating which machine should be replaced, first we have to compute the net effect of both machines individually.

Alternative A:

The net effect should be calculated by applying an equation which is shown below:

= current market value + difference of variable manufacturing cost - Cost of machine

where,

cost of machine is $115,000

Current market value is $53,000

And, difference of variable cost is

= (variable manufacturing costs - Alternative A variable cost) × number of years

= ($33,500 - $19,000) × 4

= $58,000

Now, apply these values to the above equation

So, the net effect is equals to

= ( $53,000 + $58,000 - $115,000 )

= -$4,000

Alternative B:

The net effect should be calculated by applying an equation which is shown below:

= current market value + difference of variable manufacturing cost - Cost of machine

where,

cost of machine is $125,000

Current market value is $53,000

And, difference of variable cost is

= (variable manufacturing costs - Alternative A variable cost) × number of years

= ($33,500 - $15,000) × 4

= $74,000

Now, apply these values to the above equation

So, the net effect is equals to

= ( $53,000 + $74,000 - $125,000 )

= $2,000

After calculations, we get to know that Alternative B has positive amount which reflect the better profits and better returns in the future.

Yes, Xinhong  replace its manufacturing machine i.e Alternative A because it have negative effect on the net income. So, Alternative B should be purchased and Alternative A should be replaced.

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