Last year (2013), Richter Condos installed a mechanized elevator for its tenants

Question

Last year (2013), 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 $104,600 $159,979 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 $ 35,961 $ 10,706 Fixed 23,500 8,159 Annual revenues are $240,567, and selling and administrative expenses are $29,123, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2014, Richter Condos will be able to sell it for $25,846. Collapse question part (a) Determine any gain or loss if the old elevator is replaced. $

Explanation / Answer

Old Elevator New elevator Difference Purcahse price $104,600 159979 $55,379 Useful life 5 4 Annual Depreciation $20,920 $39,995 $19,075 Variable 35961 10706 Fixed $23,500 8159 Cost saved on Variable and fixed $59,461 $18,865 $40,596 Annual revenue $240,567 Selling & Administrative Expenses 29213 1) Sale of Old Elevator 25846 2) saving if new elevator is purchased $40,596 Less: Excess Depreciation $19,075 Cost saving $47,367 2) saving if new elevator is purchased $40,596 Less: Excess Depreciation $19,075 Cost saving $21,521 So gain

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