Last year, Pizza Hut bought a new commercial oven for the restaurant. Don, the manager, went to another restaurant to see the oven. He was impressed with the cost-efficiency. Upon returning, he asked his purchasing agent to collect price and operating cost data on the oven. He also asked the company's accountant to provide him with cost data on the existing old oven. See this below...
Old oven
New oven
Purchase price
$125,400
$179,000
Estimated salvage value
$0
$0
Estimated useful life
6 years
5 years
Depreciation method
Straight-line
Straight-line
Annual operating expenses other than depreciation:
Variable
$35,800
$11,700
Fixed
$23,000
$9,000
The annual revenues are $239,700 and selling and administrative expenses are $29,500, regardless of which oven is used. If it replaces the old oven now, at the beginning of 2022, Pizza Hut will be able to sell it for $25,000.
Determine any gain or loss if the old oven is replaced.
If the old oven is replaced, Pizza Hut will incur a profit or loss of $_____.
Create a 5-year summarized income statement for each of the following assumptions:
I. The old oven is kept.
Sales
Less costs:
Variable operating costs
Fixed operating costs
Selling and administrative
Depreciation
Enter a subtotal of the four previous amounts
Net income
$enter a total amount
II. The old oven is replaced.
Sales
Less costs:
Variable operating costs
Fixed operating costs
Selling and administrative
Depreciation
Enter a subtotal of the four previous amounts
Operating income
Enter a total amount for the first part
Less: Loss on old oven
Net income
$enter a total amount
Using incremental analysis, determine whether the old oven should be replaced. If an amount reduces the net income, then enter it with a negative sign preceding the number.
Retain
Old oven
Replace
Old oven
Net Income
Increase (Decrease)
Variable operating costs
Fixed operating costs
New oven cost
Salvage on the old oven
Totals
SHOULD THE OLD OVEN BE REPLACED? YES OR NO? _________