Answer:
Explanation:
Explanation:
. Determine any gain or loss if the old elevator is replaced.
Cost$120,000 Accumulated depreciation(24,000*)Book value96,000Sales proceeds(25,000) Loss on sale $ 71,000*$120,000 ÷ 5 years = $24,000 [$120,000 – ($120,000 ÷ 5) - $25,000 = $71,000][Cost – Accum. depr. – Sales proceeds = Loss on sale]
b. Prepare a 4-year summarized income statement for each of the following assumptions:
1.The old elevator is retained. Retain Old Elevator Revenues ($240,000 X 4 yrs.) $960,00012
Less costs:Variable costs ($35,000 X 4)$140,000Fixed costs ($23,000 X 4)92,000Selling & administrative116,000*Depreciation96,000444,000Net income$516,000*($29,000 X 4)
2.The old elevator is replaced.Replace Old Elevator Revenues $960,000 Less costs: Variable costs ($10,000 X 4)$ 40,000 Fixed costs ($8,500 X 4) 34,000 Selling and administrative 116,000 Depreciation 160,000350,000 Operating income 610,000 Less: Loss on old elevator 71,000 Net income $539,000[$960,000 – (($10,000 x 4) + ($8,500 x 4) + ($29,000 x 4) + ($40,000 x 4)) - $71,000 = $539,000][Rev. – ((VC x No. of yrs.) + (FC x No. of yrs.) + (S&A exp. x No. of yrs.) + (Ann. depr. x No. of yrs.) – Loss on old elevator = Net inc.]
c. Using incremental analysis, determine if the old elevator should be replaced. Retain Old Elevator Replace Old Elevator Net Income Increase (Decrease) Variable operating costs $140,000$ 40,000$ 100,000 Fixed operating costs 92,000 34,000 58,000 New elevator cost-160,000 (160,000) Salvage on old elevator-(25,000)25,000Totals$232,000$209,000$ 23,000d. Why any gain or loss should be ignored in the decision to replace the old elevator.
