Assuming last year (2013), Richter Condos installed a mechanized elevator for its tenants. The...
Question:
Assuming last year (2013), 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, the comfort of the 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 | $100,700 | $159,210 |
| 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 | $34,954 | $10,403 |
| Fixed | $22,180 | $8,015 |
Annual revenues are $240,459, and selling and administrative expenses are $28,550, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2014, Richter Condos will be able to sell it for $25,569.
NOTE:
| Loss on Replacement of Elevator | (54,991) |
(a) Prepare a 4-year summarized income statement for each of the following assumptions:
(1) The old elevator is retained.
| Retain Old Elevator Sales | $__________ |
| Fewer costs: | |
| Variable costs | $__________ |
| Fixed costs | __________ |
| Selling & administrative | __________ |
| Depreciation | __________ |
| Net income | $__________ |
(2) The old elevator is replaced.
| Retain Old Elevator Sales | $__________ |
| Fewer costs: | |
| Variable costs | $__________ |
| Fixed costs | __________ |
| Selling & administrative | __________ |
| Depreciation | __________ |
| Net income | $__________ |
Replacement of Equipment:
When a company is considering replacing old equipment with newer ones, the concept of relevant costs is important, as costs incurred in the past, such as the purchase price of the old equipment, are a sunk costs and so irrelevant to the decision.
Answer and Explanation: 1
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| Retain Old Elevator | Repalce Old Elevator | |
|---|---|---|
| Sales | $961,836 ($240,459 x 4) | $961,836 |
| Minus costs: | ||
| Variable costs | 139,816 | 41,612 |
| Fixed costs | 88... |
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Chapter 8 / Lesson 1Explore relevant and irrelevant costs. Study the definitions and types of relevant and irrelevant costs, and discover examples of relevant costs in decision-making.