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 $95,000 $159,000 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 $34,000 $9,000    Fixed 22,000 8,000 Annual revenues are $239,000, and selling and administrative expenses are $28,000, 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 $24,000.

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

Solutions:

Computation of Gain or Loss If Old Elevator is Replaced
Cost of Old Elevator	95000
Less: Accumulated Depreciation (95000/5)	19000
Book Value	76000
Less: Sale Proceeds	24000
Loss on sale	52000
Income Statement- If Old elevator is retained
	Retain Old Elevator
Revenues ($239000*4)		956000
Less: Costs
Variable costs	136000
Fixed Costs	88000
Selling and Administrative	112000
Depreciation	76000	412000
Net Income		544000
Income Statement- If Old elevator is replaced
	Replace Old Elevator
Revenues ($239000*4)		956000
Less: Costs
Variable costs	36000
Fixed Costs	32000
Selling and Administrative	112000
Depreciation	159000	339000
Operating Income		617000
Less: Loss on Old Elevator		-52000
Net Income		565000
Incremental Analysis
	Retain Old Elevator	Replace Old Elevator	Net Income Increase (Decrease)
Variable Operating costs	136000	36000	100000
Fixed Operating Costs	88000	32000	56000
New Elevator Cost		159000	-159000
Salvage on Old Elevator		-24000	24000
Totals	224000	203000	21000
Decision: Using Incremental Analysis , It is more profitable to replace the old elevator.