Problem 26-3A LINK TO TEXT LINK TO TEXT Problem 26-3A Last year (2016), Richter

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Problem 26-3A

LINK TO TEXT

LINK TO TEXT

Problem 26-3A

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 $105,000 $160,000 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 $35,100 $11,000    Fixed 23,800 8,000
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, Richter Condos will be able to sell it for $24,500.

Explanation / Answer

If the old elevator is replaced: Loss of $ 59,500.

Book Value of the old elevator = $ 105,000 / 5 x 4 = $ 84,000.

Gain ( loss) on sale of old elevator = Sale Proceeds - Book Value = $ 24,500 - $ 84,000 = $ (59,500)

1. Retain Old Elevator:

2. Replace Old Elevator:

Incremental Analysis:

Apart from the speed of the new elevator, and the comfort associated , it also leads to an increase in net income by $ 24,100 over the next four years, as compaed to the old elevator. Therefore, it makes sense to replace the old elevator with the new one.

Revenues ( $ 241,000 x 4) $ 964,000 Less Costs Variable Costs ( $ 35,100 x 4) 140,400 Fixed Costs ( $ 23,800 x 4) 95,200 Selling and Administrative ( $ 29,000 x 4) 116,000 Depreciation ( $ 21,000 x 4) 84,000 435,600 Net Income 528,400

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