Tony Hawk (TH) Ltd. is currently faced with a critical decision regarding its production equipment. Tony Hawk (TH) is evaluating two options for its production equipment: upgrading or replacing. The company manufactures and sells 7,500 heaters every year, each priced at $920. The current production equipment, which was acquired at a cost of $2,150,000, has been in use for just two years and is subject to straight-line depreciation over a five-year useful life. Furthermore, it possesses no terminal disposal value, but it can be currently sold for $650,000. The following table presents data for the two alternatives: A B C Choice: Upgrade Replace One-time equipment costs: $3,500,000 $5,200,000 Variable manufacturing cost per Heater $180 $90 Remaining useful life of equipment (years) 3 3 Terminal disposal value of equipment 0 0 Required: 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 TH: Upgrade the equipment? Replace the equipment? 4. Nick Koe is TH's manager, who will be relocated after one year and whose bonus is based on operating income. Given unchanged data, evaluate Nick's decision-making process and which alternative he would choose, taking into account his relocation and bonus dependence. 5. By reference to the above data: Explain whether historical costs and future costs are relevant? Differentiate between quantitative and qualitative aspects in the process of decision—making?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Tony Hawk (TH) Ltd. is currently faced with a critical decision regarding its production equipment. Tony Hawk (TH) is evaluating two options for its production equipment: upgrading or replacing. The company manufactures and sells 7,500 heaters every year, each priced at $920. The current production equipment, which was acquired at a cost of $2,150,000, has been in use for just two years and is subject to straight-line depreciation over a five-year useful life. Furthermore, it possesses no terminal disposal value, but it can be currently sold for $650,000.

The following table presents data for the two alternatives:

A	B	C
Choice:	Upgrade	Replace
One-time equipment costs:	$3,500,000	$5,200,000
Variable manufacturing cost per Heater	$180	$90
Remaining useful life of equipment (years)	3	3
Terminal disposal value of equipment	0	0

Required:

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 TH:

Upgrade the equipment?
Replace the equipment?

4. Nick Koe is TH's manager, who will be relocated after one year and whose bonus is based on operating income. Given unchanged data, evaluate Nick's decision-making process and which alternative he would choose, taking into account his relocation and bonus dependence.

5. By reference to the above data:

Explain whether historical costs and future costs are relevant?
Differentiate between quantitative and qualitative aspects in the process of decision—making?

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