QUESTION:

Sugar Sweet {33} Company produoes and sells 1,000 specialty Treats per year at a selling price of $050 each. Its current production equipment, purchased for $1 $50,000 and with a ve-year useful life, is only two years old. It has a terminal disposal value of $0 and is depreciated on a straight-line basis. The equipment has a current disposal price of $500,000. However, the emergence of a new technology has led SE to consider either upgrading or replacing the production equipment. The following table presents data for the ve alternatives: A B C 1 Choice Upgrade Replace 2 Duevtinte equipment costs $3,000,000 $4,300,000 3 Variable manufacturing cost per Treat $150 $T0 4 Remaining useful life of equipment {years} 3 3 5 Terminal disposal value of equipment 0 0 Year 1 Upgrade Replace 0) S 5,950,000 S 5,950,000 7000 chairs x $150 x 3 yrs);(7000 Chairs x $70 x 3 yrs) S 3,150,000 $ 1,470,000 00 + $3,000,000) / 3; $4,800,000 / 3 1,370,000 S 1,600,000 equipment (0; $1,110,000 - $500,000 0 610,000 S 4,520,000 S 3,680,000 S 1,430,000 S 2,270,000 ent production equipment 1,850,000 reciation = 1850000/5 x 2 yrs (740,000) 1,110,000 come is higher by $840,000 ($2,270,000 - $1,430,000) under the Replace tion in the long run forTo answer the question, we need to calculate the costs for both option Option A Option B Variable cost (7000 x 150) 1,050,000 Variable cost ( 7000 x 70) 490,000 Depreciation Expense ( 1,110,000 + 3,000,000) /3 1,370,000 Depreciation expense ( 4800,000/3) 1,600,000 Total cost 2,420,000 Proceeds from disposal ( 500,000) Total costs 1,590,000 Option A Option B Sales ( 7000 x 850) 5,950,000 Sales 5,950,000 Costs (2,420,000) Costs (1,590,000) Net Income 3,530,000 Net Income 4,360,000 Based on the calculation above, it is therefore better to choose option B. As seen above, the total costs is way lower as compared to option A . Even if we don't include the disposal proceeds, the cost will still be lower. With option B having lower cost , it will also yield higher income as computed above. The manager's bonus is based on net income so , he should choose option B as it yields a higher income than option A.Step 1 Operating Income- Operating income is a secretarial figure that measures the amount of revenue realized from commerce's operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS). Step 2 4) Explanation of Which Alternative would Nick son choose- Year 1 Particulars Upgrade Replace Revenues (7,000 x $850) S 5,950,000 $ 5,950,000 Cash operating costs: (7000 chairs x $150 x 3 yrs.); (7000 Chairs x $70 x 3 S 3,150,000 $ 1,470,000 yrs.) Depreciation ($1,110,000 + $3,000,000) / 3; $4,800,000 /3 1,370,000 $ 1,600,000 Loss on disposal of old equipment (0; $1,110,000 - $500,000 0 610,000 Total costs S 4,520,000 $ 3,680,000 Operating Income S 1,430,000 2,270,000 *Book value of the current production equipment Cost 1,850,000 less: Accumulated Depreciation = 1850000/5 x 2 yrs. (740,000) Book Value 1,110,000