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 (already have answer)

Cost	120,000
Accumulated depreciation (120,000 / 6 years) x 1 year	20,000
Book Value	100,000
Less: Sales proceeds	10,000
Loss on sale	90,000

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

Answer 1

B.1

the old machine is kept-

Income Statement		All 5 Year
Revenue		20,000
Expenses
Variable exp.	30,000
Fixed exp.	20,000
Depreciation	20,000
Sellinga and administrative expenses	24,000
		94,000
Profit/Loss		(74,000)

2

the old machine is replaced

Income Statement	1st Year	Next 4 Years
Revenue	20,000	20000
Expenses
Variable exp.	10,000	10,000
Fixed exp.	7,000	7,000
Depreciation	30,000	30,000
Sellinga and administrative expenses	24,000	24,000
Loss on sale of old Machine	90,000
Total expenes	(161,000)	71,000
Profit/Loss	(141,000)	(51,000)

Depreciation	Cost-salvage/life
	(150,000-0)/5
	$            30,000.00

C

Details	Old Machine	New Machine	Increment
Revenue-20,000*5	100,000	100,000	-
Expenses
Variable exp.-30,000*5,10,000*5	150,000	50,000	100,000
Fixed exp.-20,000*5,7,000*5	100,000	35,000	65,000
Depreciation-20,000*5,30,000*5	100,000	150,000	(50,000)
Selling and administrative expenses	24,000	24,000	-
Loss on sale of old Machine (Given)		90,000	(90,000)
		Net	25,000

Yes, comapny should replace the machine as it will save total money of 25,000.

All amount is in $