Reference no: EM132279449
Question - 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 equipment's speed and cast 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 company's accountant to provide him with cast data on the company's equipment. This information is presented below.
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Old Equipment
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New Equipment
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Purchase price
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$210,000
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$250,000
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Estimated salvage value
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0
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0
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Estimated useful life
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5 years
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4 years
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Depreciation method
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Straight-line
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Straight-line
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Annual operating costs other than depreciation:
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Variable
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$50,000
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$12,000
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Fixed
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30,000
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5,000
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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.
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