Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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:

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Wiley CPAexcel Exam Review 2018 Study Guide Auditing And Attestation

Authors: Wiley

1st Edition

1119480671, 978-1119480679

More Books

Students also viewed these Accounting questions