Last year (2016), Richter Condos installed a mechanized elevator for its tenants. The owner of...
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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 | |
| Purchase price | $120,000 | $160,000 |
| Estimated salvage value | 0 | 0 |
| Estimated useful life (years) | 5 | 4 |
| Depreciation method | Straight line | Straight line |
| Annual operating costs other than depreciation | ||
| Variable | $35,000 | $10,000 |
| Fixed | 23,000 | 8,500 |
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 2017, Richter Condos will be able to sell it for $25,000.
a. Determine any gain or loss if the old elevator is replaced.
b. Prepare a 4-year summerized income statement for each of the following assumptions:
| 1. The old elevator is retained. |
| 2. The old elevator is replaced. |
c. Using incremental analysis, determine if the old elevator should be replaced.
Incremental Analysis
If there are more than two alternatives to choose from then the incremental analysis is useful in determining the feasibility of the alternatives. In this method, the cost and benefit of each alternative are compared and the alternative with the highest benefit is selected.
Answer and Explanation: 1
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Determine the g in or loss, if the old elevator is replaced:
| Particulars | Amount (S) |
|---|---|
| Purchase price (A) | 120,000 |
| Life (B) | 5 |
| Depreciation for... |
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