Last year (2019), Yi Tower installed a mechanized elevator for its tenants. The owner of the company, Hosun Yi, 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. 

Annual revenues are W240,000,000, and selling and administrative expenses are W29,000,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2020, Yi Tower will be able to sell it for W25,000,000.

Instructions

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

b. Prepare a 4-year summarized 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.

d. Write a memo to Hosun Yi explaining why any gain or loss should be ignored in the decision to replace the old elevator.

Transcribed Image Text:

Old Elevator New Elevator W160,000,000 W120,000,000 Purchase price Estimated residual value Estimated useful life Depreciation method Annual operating costs 5 years Straight-line 4 years Straight-line other than depreciation: Variable W 35,000,000 W 10,000,000 8,500,000 Fixed 23,000,000