The TechNet Company produces and sells 5,500 modular computer desks per year at

Question

The TechNet Company produces and sells 5,500 modular computer desks per year at a selling price of $550 each. Its current production equipment, purchased for $1,950,000 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 $550,000. However, the emergence of a gy has led iechle t consider either uprading or replacing the diment The folouing tablie presents data for the two alternatives: (Click to view the data for the two alternatives.) All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money Data Table Upgrade Replace 3,200,000 4,100,000 One-time equipment costs Variable manufacturing cost per desk Remaining useful life of equipment (years) Terminal disposal value of equipment 135 S 3 0 S

Explanation / Answer

Cash operating Cost is calculated as under:

Upgrade:

Variable manufacturing Cost is equal to $135*5,500 = 742,500

Depreciation $1066667

Replace:

Variable manufacturing Cost is equal to $90*5,500 = 495,000

Depreciation $1366667

Replacing is better than upgrade.

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