Problem 20-4A (Part Level Submission)

Last year (2016), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, 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 companys accountant to provide him with cost data on the companys elevator. This information is presented below.

		Old Elevator			New Elevator
Purchase price		$98,500			$159,000
Estimated salvage value		0			0
Estimated useful life		5 years			4 years
Depreciation method		Straight-line			Straight-line
Annual operating costs
other than depreciation:
Variable		$34,400			$11,000
Fixed		22,400			8,600

Annual revenues are $240,000, and selling and administrative expenses are $28,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2017, Richter Condos will be able to sell it for $24,700.

(b)

Prepare a 4-year summarized income statement for each of the following assumptions: (1) The old elevator is retained.

				Retain Old Elevator
Revenues				$
Less costs:
Variable costs		$
Fixed costs
Selling & administrative
Depreciation
Net income				$

(2) The old elevator is replaced.

				Replace Old Elevator
Revenues				$
Less costs:
Variable costs		$
Fixed costs
Selling & administrative
Depreciation
Operating income
Less: Loss on old elevator
Net income				$