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 $98,500 $159,000 4 years Straight-line Straight-line Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs other than depreciation: Variable Fixed $35,300 24,000 $10,000 8,900 Annual revenues are $239,000, 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 $25,700. Determine any gain or loss if the old elevator is replaced.

Answer 1

Gain/Loss on sale of old elevatr
Cost of elevator	$         98,500
Useful life	5 years
Depreication for 2016 (98500/5)	$         19,700
Book value as on January 1 2017	$         78,800
Less:Sale value	$       (25,700)
Loss on sale of old elevator	$         53,100

1)

the old elevator is retained
Revenue (239000*4)		$        9,56,000
Less:Costs
Variable costs (35300*4)	$        1,41,200
Fixed costs (24000*4)	$            96,000
Selling & Administrative(29000*4)	$        1,16,000
Depreciation (98500*4/5)	$            78,800	$        4,32,000
Net Income		$        5,24,000

2)

The old elevator is replaced
Revenue (239000*4)		$ 9,56,000
Less:Costs
Variable costs (10000*4)	$     40,000
Fixed costs (8900*4)	$     35,600
Selling & Administrative (29000*4)	$ 1,16,000
Depreciation	$ 1,59,000	$ 3,50,600
Operating Income		$ 6,05,400
Less: Loss on old elevator		$     53,100
Net Income		$ 5,52,300

	Retain old elevator	Replace old elevator	Net Income Increase or (Decrease)
Variable operating costs	$      1,41,200	$     40,000	$     1,01,200
Fixed operating costs	$         96,000	$     35,600	$         60,400
New levator costs	0	$ 1,59,000	$   (1,59,000)
Salvage on old elevator	0	$   (25,700)	$         25,700
	$      2,37,200	$ 2,08,900	$         28,300