Question
The TechHelp Company produces and sells 6,400 modular computer desks per year at a selling price of $650 each. Its current production equipment, purchased for
The TechHelp Company produces and sells 6,400 modular computer desks per year at a selling price of $650 each. Its current production equipment, purchased for $1,200,000 and with a 5-year useful life, is only 2 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 $450,000. However, the emergence of a new molding technology has led TechHelp to consider either upgrading or replacing the production equipment. The following table presents data for the two alternatives:
| A | B | C |
1 |
| Upgrade | Replace |
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2 | One-time equipment costs | $2,900,000 | $4,200,000 |
3 | Variable manufacturing cost per desk | $155 | $85 |
4 | Remaining useful life of equipment (in years) | 3 | 3 |
5 | Terminal disposal value of equipment | $0 | $0 |
All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money
Requirement 4. Assume that all data are as given in the original exercise. Dan Doria is TechHelp'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.
Begin by calculating the operating income under each alternative. (If an input field is not used in the table, leave the input field empty; do not enter a zero. Round all amounts to the nearest whole number.)
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| Upgrade | Replace | ||
Revenues |
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Cash operating costs |
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Depreciation |
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Loss on disposal of old equipment |
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Total costs |
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Operating income |
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