Last year (2011), Solomon Condos installed a mechanized elevator for its tenants. The

Problem 26-4A

Last year (2011), Solomon Condos installed a mechanized elevator for its tenants. The owner of the company, Sam Solomon, 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		$180,000
Estimated salvage value		0		0
Estimated useful life		6 years		5 years
Depreciation method		Straight-line		Straight-line
Annual operating costs other than depreciation:
Variable		$ 35,000		$ 12,000
Fixed		23,000		8,400

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 2012, Solomon Condos will be able to sell it for $25,000.

 

Determine any gain or loss if the old elevator is replaced.

Prepare a 5-year summarized income statement for each of the following assumptions:

(1) The old elevator is retained.

(2) The old elevator is replaced.

Prepare incremental analysis, to determine whether to replace or retain the old elevator. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter loss of contribution / profit with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter all other amounts as positive and subtract where necessary.)

Should the old elevator be replaced.

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