Question

Quik Press Inc. offers one day dry cleaning. at the beginning of 2015, th company purchased a mechanized pressing machine. the owner of the company, Jill Jabowski, recently retured from an industry equipment exhibition where you saw a computerized pressing machine demonstrated. she was impressed with the machines speed, efficiency, and quality of output. upon retuning from the exhibition, she asked her purchasing agent to cleect price and operating cost data on the ew pressing machine. in addition, she asked the company's accountant to provide her with cost data on the company's pressing machine. this information is presented below:

	old pressing machine	new pressing machine
purchase price	120,000	150,000
estimated salvage value	0	0
estimated useful life	6 years	5 years
depreciation method	straight-line	straight-line
annual oeprating expenses other than depreciation:
variable	30,000	10,000
fixed	20,000	7000

annual revenues are 200,00, and selling and administrative expenses are 24,000, regardless of which pressing machine is used. if it replaces the old machine now, at the beginning of 2016, Quik Press will be able to sell it for 10,000

a) determine any gain or loss if the old pressing machine is replaced

b) prepare a five year summarized income statement for each of the following assumptions:

              1) the old machine is kept

              2) the old machine is replaced

c) using incremental analysis, determine whther the company should replace the old pressing machine

d) The purpose of this memo is to explain to Jill why the $90,000 loss on sale is NOT relevant. In other words, explain to her why book value (historical cost – accumulated depreciation) is not relevant.

Answer 1

a. Gain or Loss analysis if the old pressing machine is replaced

Particulars	Old Pressing Machine	New Pressing Machine
A. Annual Revenue	2,00,000	2,00,000
Annual Operating Expences
Variable	30,000	10,000
Fixed	20,000	7,000
Selling & Admin Expences	24,000	24,000
Depreciation	20,000	30,000
B. Total Expences	94,000	71,000
C. Net Revenue (A-B)	1,06,000	1,29,000

Net gain of 23,000 (129,000 - 106,000) per year if old machine is replaces with new machine

B. Five year summarized income statement

1) the old machine is kept for 5 year

Particulars	Old Pressing Machine
A. Annual Revenue	10,00,000
Annual Operating Expences
Variable	1,50,000
Fixed	1,00,000
Selling & Admin Expences	1,20,000
Depreciation	1,00,000
B. Total Expences	4,70,000
C. Net Revenue (A-B)	5,30,000

2) the old machine is replaced

Particulars	New Pressing Machine
A. Annual Revenue	10,00,000
Annual Operating Expences
Variable	50,000
Fixed	35,000
Selling & Admin Expences	1,20,000
Depreciation	1,50,000
B. Total Expences	3,55,000
C. Net Revenue (A-B)	6,45,000
D. Loss on sales of old machine	90,000
E. Net Revenue	5,55,000

Old machine used for one year

Old machine purchase price = 120000

Less One year depreciation         20000

Less Sales Value                        10000

Net Loss on sale                        90000

c. incremental analysis on the basis of 5 years data

Particulars	New Pressing Machine	Old Pressing Machine	Net Incremental Revenue
A. Annual Revenue	10,00,000	10,00,000	-
Annual Operating Expences
Variable	50,000	1,50,000	(1,00,000)
Fixed	35,000	1,00,000	(65,000)
Selling & Admin Expences	1,20,000	1,20,000	-
Depreciation	1,50,000	1,00,000	50,000
B. Total Expences	3,55,000	4,70,000	(1,15,000)
C. Net Revenue (A-B)	6,45,000	5,30,000	1,15,000
D. Loss on sales of old machine	90,000	-	90,000
E. Net Revenue	5,55,000	5,30,000	25,000

The company should replaces the machine and it will get incremental revenue of 25,000 from this

d.