Question
Sugar Sweet (SS) Company produces and sells 7,000 specialty Treats per year at a selling price of $850 each. Its current production equipment, purchased
Sugar Sweet (SS) Company produces and sells 7,000 specialty Treats per year at a selling price of $850 each. Its current production equipment, purchased for $1,850,000 and with a five-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 SS to consider either upgrading or replacing the production equipment. The following table presents data for the two alternatives: B C 1 Choice 2 One-time equipment costs Upgrade Replace $3,000,000 $4.800.000 3 Variable manufacturing cost per Treat $150 $70 4 Remaining useful life of equipment (years) 3 3 5 Terminal disposal value of equipment
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