Question

Last year (2016), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the company’s accountant to provide him with cost data on the company’s elevator. This information is presented below.

		Old Elevator			New Elevator
Purchase price		$100,000			$160,000
Estimated salvage value		0			0
Estimated useful life		5 years			4 years
Depreciation method		Straight-line			Straight-line
Annual operating costs
other than depreciation:
Variable		$35,300			$10,000
Fixed		22,800			8,800

Annual revenues are $241,000, and selling and administrative expenses are $28,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2017, Richter Condos will be able to sell it for $24,400.

Determine any gain or loss if the old elevator is replaced.

Gain on saleLoss on sale

$

eTextbook and Media

  

  

Prepare a 4-year summarized income statement for each of the following assumptions:

(1) The old elevator is retained.

				Retain Old Elevator
Revenues				$
Less costs:
Variable costs		$
Fixed costs
Selling & administrative
Depreciation
Net income				$

(2) The old elevator is replaced.

				Replace Old Elevator
Revenues				$
Less costs:
Variable costs		$
Fixed costs
Selling & administrative
Depreciation
Operating income
Less: Loss on old elevator
Net income				$

eTextbook and Media

  

  

Using incremental analysis, determine if the old elevator should be replaced. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Retain Old Elevator		Replace Old Elevator		Net Income Increase (Decrease)
Variable operating costs		$		$		$
Fixed operating costs
New elevator cost
Salvage on old elevator
Totals		$		$		$

Answer 1

Income Statement
		Retain Old Elevator
Revenues		964,000
Less: costs
Variable costs	141,200
Fixed costs	91,200
Selling and Admin	112,000
Depreciation	80,000	424,400
Net Income		539,600
Income Statement
		Replace Old Elevator
Revenues		964,000
Less: costs
Variable costs	40,000
Fixed costs	35,200
Selling and Admin	112,000
Depreciation	160,000	347,200
Net Income		616,800
Incremental Analysis
	Retain	Replace	Net Income increase
Variable operating costs	141,200	40,000	101,200
Fixed operating costs	91,200	35,200	56,000
New Elevator cost	0	160,000	-160,000
Salvage on old elevator	0	-24,400	24,400
Totals	232,400	210,800	21,600
SHOULD BE REPLACED