QUESTION:

Quik Press Inc. offers one-day dry cleaning. At the beginning of 2011, the company purchased a mechanized pressing machine. The owner of the company, Jill Jabowski, recently returned from an industry equipment exhibition where she saw a computerized pressing machine demonstrated. She was impressed with the machine's speed, efficiency, and quality of output. Upon returning from the exhibition, she asked her purchasing agent to collect price and operating cost data on the new pressing machine. In addition, she asked the company's accountant to provide her with cost data on the company's pressing machine. This information is presented below:

Annual revenues are $200,000, and selling and administrative expenses are $24,000, regardless of which pressing machine is used. If it replaces the old machine now, at the beginning of 2012, Quik Press will be able to sell it for $10,000.

Instructions

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

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

1. The old machine is kept.

2. The old machine is replaced.

(c) Using incremental analysis, determine whether the company should replace the old pressing machine.

(d) Write a memo to Jill Jabowski explaining why any gain or loss should be ignored in the decision to replace the old pressing machine?

Quik Press Inc offers one day dry cleaning At the beginning

RELEVANT INFORMATION

See attached screenshot.

Annual Revenues: S 200,000 Selling 8: Admin Costs 5 24,000 Salvage machine if sell now, before useful life 5 10,000 Old Pressing Machine New Pressing Machine Purchase price 5 120,000 5 150,000 Estimated salvage value @ end of life S - S - Estimated useful life 6 yea rs 5 yea rs Depreciation method Straight-line Straight-line Annual operating expenses other than depreciation: Variable 5 30,000 5 10,000 Fixed $ 20,000 $ 7,000