The Dowling Company produces and sells 5,800 modular computer desks per year at a selling price of $480 each. Its current production equipment, purchased for $1,200,000 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 $575,000. However, the emergence of a new moulding technology has led Dowling to consider either upgrading or replacing the production equipment. The following table presents data for the two alternatives: (Click icon to view the data.) Data table All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money. 2. Now, suppose the one-time equipment cost to replace the production equipment is somewhat negotiable. All other data are as given previously. What is the maximum one-time equipment cost that Dowling would be willing to pay to replace the old equipment rather than upgrade it? 3. Assume that the capital expenditures to replace and upgrade the production equipment are as given in the original exercise but that the production and sales quantities are not known. For what production and sales quantities would Dowling (a) upgrade the equipment or (b) replace the equipment? 4. Assume that all data are as given in the original exercise. Dan Doria is Dowling's manager, and his bonus is based on operating income. Because he is likely to relocate after about a year, his current bonus is his primary concern. Which alternative would Doria choose? Explain. Requirement 1. Should Dowling upgrade its production line or replace it? Show your calculations. (Only complete the necessary answer boxes. Leave unused cells blank. Use parentheses or a minus sign for a negative cost.) Dowling Company should the equipment. When comparing relevant costs between the choices, replacing the equipment is than the cost to upgrade. Requirement 2. Now, suppose the one-time equipment cost to replace the production equipment is somewhat negotiable. All other data are given previously What is the maximum one-time equipment cost that Dowling would be willing to pay to replace the old equipment rather than Dowling would be willing to pay up to $ Requirement 3. Assume that the capital expenditures to replace and upgrade the production equipment are as given in the original exercise but that the production and sales quantity is not known. For what production and sales quantity would Dowling (a) upgrade the equipment or (b) replace the equipment? (Round your answer to the nearest whole number.) Dowling would want to upgrade if the production and sales quantity was less than units for the three years. Requirement 3. Assume that the capital expenditures to replace and upgrade the production equipment are as given in the original exercise but that the production and sales quantity is not known. For what production and sales quantity would Dowling (a) upgrade the equipment or (b) replace the equipment? (Round your answer to the nearest whole number.) Dowling would want to upgrade if the production and sales quantity was less than units for the three years. Requirement 4. Assume that all data are as given in the original exercise. Dan Doria is Dowling's manager, and his bonus is based on operating income. Because he is likely to relocate after about a year, his current bonus is his primary concern. Which alternative would Doria choose? Explain. (Round your answers to the nearest whole dollar. Do not leave any cells blank.) Use the table below to compute the operating income for each of the options. First-year operating income is by $ under the upgrade alternative, and Dan Doria, with his one-year horizon and operating income-based bonus, will choose the alternative. even thouah. as seen in reauirement 1. the alternative is better in the lona run for Dowling. This exercise illustrates
