Question

Problem 12-4 Last year (2016), Blue 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 $105,000 $160,000 Purchase price Estimated salvage value Estimated useful life 0 5 years 4 years Straight-line Straight-line Depreciation method Annual operating costs other than depreciation: Variable $35,100 23,800 $11,000 8,000 Fixed Annual revenues are $241,000, 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, Blue Condos will be able to sell it for $24,500.

Answer 1

Analysis

	Retain old elevator	Replace old elevator	Net income increase (decrease)
Variable operating costs	140400	44000	96400
Fixed operating costs	95200	32000	63200
New elevator cost		160000	-160000
Salvage an old elevator		-24500	24500
Totals	235600	211500	24100