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P7-4B Last year (2013), Simmons Company

Price: $2.50


Last year (2013), 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 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 company’s accountant to provide him with cost data on the company’s equipment.
This information is presented below.

Old Equipment New Equipment
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 2014, 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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