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 o the company's elevator. This information is presented below. Old Elevator New Elevator $98,500 $161,000 0 5 years 4 years Straight-line Straight-line o Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs other than depreciation: Variable Fixed $35,000 22,800 $11,000 9,000 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 2020, Richter Condos will be able to sell it for $25,700. Determine any gain or loss if the old elevator is replaced. Loss on sale Gain on sale

Answer 1

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Part A
Purchase Price		$               98,500
Less: Depreciaton for 2019	$98,500/5 Years	$            (19,700)
Book Value at beginning of the Year 2020		$               78,800
Less: Sale Value		$            (25,700)
Loss on sale of elevator		$               53,100
Part 1
Revenue		$            960,000
Less: Costs
Variable Costs	$                    140,000
Fixed Costs	$                      91,200
Selling and Administrative	$                    116,000
Depreciation ($98,500/5)*4	$                      78,800	$          (426,000)
Net Income		$            534,000
Part 2
Revenue		$            960,000
Less: Costs
Variable Costs	$                      44,000
Fixed Costs	$                      36,000
Selling and Administrative	$                    116,000
Depreciation ($161,000/4)*4	$                    161,000	$          (357,000)
Net Income		$            603,000
Incremental Analysis
	Retain old	Replace Old	Net Income Increase(Decrease)
Variable Operating Cost	$                    140,000	$               44,000	$                                                     96,000
Fixed Operating Cost	$                      91,200	$               36,000	$                                                     55,200
New Elevator Cost	$                               -	$            161,000	$                                                (161,000)
Salvage of old Elevator	$                               -	$            (25,700)	$                                                     25,700
	$                    231,200	$            215,300	$                                                     15,900
Should be replaced as cost is less