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: A B C 1 Choice Upgrade Replace 2 One-time equipment costs $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 0 0 4. Assume that all data are as given in the original exercise. Nick Son is SS’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 Nick Son choose? Explain.
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:
|
|
A |
B |
C |
|
1 Choice |
Upgrade |
Replace |
|
|
2 |
One-time equipment costs |
$3,000,000 |
$4,800,000 |
|
3 |
Variable |
$150 |
$70 |
|
4 |
Remaining useful life of equipment (years) |
3 |
3 |
|
5 |
Terminal disposal value of equipment |
0 |
0 |
4. Assume that all data are as given in the original exercise. Nick Son is SS’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 Nick Son choose? Explain.
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