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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.

		Old Equip		New Equip
Purchase price		$210,000		$250,000
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		$50,000		$12,000
Fixed		30,000		5,000

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.

(a)	Cost	$210,000
	Less Accumulated depreciation	(42,000*)
	Book value	168,000
	Sales proceeds	(58,000)
	Loss on sale	$110,000

.

*$210,000 5 years = $42,000

(b) (1)	Retain Old Equipment
	Revenues ($360,000 X 4 yrs.)		$1,440,000
	Less costs:
	Variable costs
	Fixed costs
	Selling & adm (45,000 x 4 yrs)	180,000
	Depreciation
	Net income

(2)	Replace Old Equipment
	Revenues ($360,000 X 4 yrs.)		$1,440,000
	Less costs:
	Variable costs
	Fixed costs
	Selling and adm (45,000 x 4 yrs)	180,000
	Depreciation
	Operating income
	Less: Loss on old equipment
	Net income

(c)		Retain Old Equipment	Replace Old Equipment	Net Income Incr / Decr
	Variable costs
	Fixed costs
	New equipment cost
	Salvage on old equipment
	Totals

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