Question

At the beginning of last year (2019), 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 $103,500 $161,000 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 $34,600 $10,000    Fixed 23,600 8,800 Annual revenues are $239,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2020, Richter Condos will be able to sell it for $24,400.

Determine any gain or loss if the old elevator is replaced. Loss on saleGain on sale $

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 Loss on old elevator Net income $

Using incremental analysis, determine if the old elevator should be replaced. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -15 or parentheses e.g. (15).) Retain Old Elevator Replace Old Elevator Net Income Increase (Decrease) Variable operating costs $ $ $ Fixed operating costs New elevator cost Salvage on old elevator    Totals $ $ $ The old elevator shouldshould not be replaced.

Answer 1

Req.1

Loss on sale

$ 58,4000

Explanation:

1)

Purchase Price		$ 103,500
Less: Depreciaton for 2019	$103,500/5 Years	$ (20,700)
Book Value at beginning of the Year 2020		$ 82,800
Less: Sale Value		$ (24,400)
Loss on sale of elevator		$ 58,400

Req.2

(1)  The old elevator is retained:

	Retain Old Elevator
Revenue ($239,000×4)		$            956,000
Less: Costs
Variable Costs( 34,600*4)	$                    138,400
Fixed Costs($23,600*4)	$                      94,400
Selling and Administrative( 29,000*4)	$                    116,000
Depreciation ($103,500/5)*4	$ 82,800	$          (431,600)
Net Income		$524,400

(2) The old elevator is replaced.

Revenue		$            956,000
Less: Costs
Variable Costs ($10,000×4)	$                      40,000
Fixed Costs( $8800×4)	$                      35,200
Selling and Administrative($29,000×4)	$                    116,000
Depreciation ($161,000/4)*4	$                    161,000	$          (352,200)
Net Income		$ 603,800

Req.3 Incremental Analysis:

	Retain Old Elevator	Replace Old Elevator	Net Income Increase (Decrease
Variable operating costs	$138,400	$40,000	$98,400
Fixed operating costs	$ 94,400	$35,200	$59,200
New elevator cost	$0	$161,000	($161,000)
Salvage on old elevator	$0	($24,400)	24,400
Totals	$232,800	$211,800	$21,000

( Should be replaced as cost is less)