IF CANNOT ANSWER BOTH QUESTIONS, PLEASE SKIP

QUESTION ONE: Last year (2016), Simmons Company installed new factory equipment. The owner of the company, Gene Simmons, recently returned from an industry equipment exhibition where he watched computerized equipment demonstrated. He was impressed with the equipments speed and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new equipment. In addition, he asked the companys accountant to provide him with cost data on the companys equipment. This information is presented below.QUESTION ONE:

Annual revenues are $360,000, and selling and administrative expenses are $45,000, regardless of which equipment is used. If the old equipment is replaced now, at the beginning of 2017, Simmons Company will be able to sell it for $58,000.

Instructions

(a) Determine any gain or loss if the old equipment is replaced.

(b) Prepare a 4-year summarized income statement for each of the following assumptions:

(1) The old equipment is retained.

(2) The old equipment is replaced.

(c) Using incremental analysis, determine if the old equipment should be replaced.

QUESTION TWO: Morello Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months of 2017, the company reported the following operating results while operating at 90% of plant capacity and producing 90,000 units.

Fixed costs for the period were cost of goods sold $900,000, and selling and administrative expenses $180,000.

In July, normally a slack manufacturing month, Morello receives a special order for 10,000 basketballs at $30 each from the Chinese Basketball Association (CBA). Acceptance of the order would increase variable selling and administrative expenses $0.50 per unit because of shipping costs but would not increase fixed costs and expenses.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Morello Inc. accept the special order?

Old Equipment $210,000 New Equipment $250,000 5 years Straight-line 4 years Straight-line Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs other than depreciation: Variable Fixed $50,000 30,000 $12,000 5,000 (a) - Show your calculations below: Book Value (b-1) 4 year Income Statement Revenues (360,000 x 4 yrs) Less Costs: Retain Old Equipment 1,440,000 Net Income (b-2)_4 year Income Statement Revenues (360,000 x 4 yrs) Less Costs: Replace Old Equipment 1,440,000 Operating (net) Income Net Income (c) Incremental Analysis Retain Old Equipment Replace Old Equipment Net Income Increase or (Decrease) Totals Per Unit $50 Sales Cost of goods sold Selling and administrative expenses Net income Amount $4,500,000 3,060,000 360,000 $1.080.000 34 Prob 21-1B Reject Order Accept Order Net Income Increase or Decrease 0 Revenues Cost of goods sold Selling & admin expenses Net income b) Accept