Last year (2016), Richter Condos installed a mechanized elevator for its tenants
ID: 2545191 • Letter: L
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
$120,000
$160,000
Estimated salvage value
0
0
Estimated useful life (years)
5
4
Depreciation method
Straight line
Straight line
Annual operating costs other than depreciation
Variable
$35,000
$10,000
Fixed
23,000
8,500
Annual revenues are $240,000, 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 2017, Richter Condos will be able to sell it for $25,000.
Instructions:
a. Determine any gain or loss if the old elevator is replaced.
b. Prepare a 4-year summerized income statement for each of the following assumptions:
1. The old elevator is raetained.
2. The old elevator is replaced.
c. Using incremental analysis, determine if the old elevator should be replaced.
Old Elevator
New Elevator
Purchase price
$120,000
$160,000
Estimated salvage value
0
0
Estimated useful life (years)
5
4
Depreciation method
Straight line
Straight line
Annual operating costs other than depreciation
Variable
$35,000
$10,000
Fixed
23,000
8,500
Explanation / Answer
Req a: Cost of old elevator: $ 120,000 Life of assets: 5 years Annual depreciation = $120,000 /5 years = $ 24,000 Cost of Old elevator 120,000 Less: Annual depreciation 24000 Book value of elevator 96000 Less: Sale value 25000 Loss on sale of elevator 71000 Req b: RETAINED REPLACED Annual revenues 960000 960000 Les: Annual operating cost Variable 140000 40000 Fixed 92000 34000 Selling expense 116000 116000 Depreciation 96000 160000 Loss on sale of old Elevator 71000 Incremental Income 444000 421000 Req c: INCREMENTAL INCOME ANALYSIS RETAINED REPLACED NET INCOME INCREASE/DECREASE Annual revenues 960000 960000 0 Les: Annual operating cost Variable 140000 40000 100000 Fixed 92000 34000 58000 Cost of New Elevator 0 160000 -160000 Salvage value of old Elevator -25000 25000 Incremental Income 728000 751000 23000
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