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.

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.
(d) Write a memo to Gene Simmons explaining why any gain or loss should be ignored in the decision to replace the oldequipment.

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Old Equipment New Equipment Purchase price Estimated salvage value Estimated useful life Depreciation method Annual operating costs $210,000 0 years Straight-line $250,000 0 years Straight-line other than depreciation: Variable Fixed $50,000 30,000 $12,000 5,000