Last year (2015), Calway Condos installed a mechanized elevator for its tenants. The owner of the company, Cab Calway, recently returned from an industry equipment exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfortable 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. The information is presented below:

Annual revenues are $240,000 and selling and administrative expenses are $29,000, regardless of which elevator is used. If it replaces the old elevator now, at the beginning of 2016, Calway Condos will be able to sell it for $25,000.
Instructions
(a) Determine any gain or loss if the old elevator is replaced.
(b) Prepare a five-year summarized income statement for each of the following assumptions:
1. The old elevator is kept.
2. The old elevator is replaced.
(c) Using incremental analysis, determine whether the old elevator should be replaced.
(d) Write a memo to Cab Calway explaining why any gain or loss should be ignored in the decision to replace the old elevator.

Transcribed Image Text:

Old Elevator $120,000 New Elevator $180,000 Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating expenses other than depreciation: 5 years Straight-line Straight-line 6 years Variable Fixed $ 35,000 23,000 12,000 8,400