Question

Problem 2 involvesa fixed asset decision.
FACTS:
1. Elliott Incorporatedmanufactures garden tools, and although the manufacturing equipmentis perfectly functional, it is not modern.
2. Upgrading to modernequipment would speed up the manufacturing process such that directlabor and variable manufacturing costs
wouldbe reduced by 40% on a per-unit basis. Hint: You do not needcurrent units produced to calculate this problem.
3. The cost of such an upgradewould equal $1,500,000 per year for depreciation and financingcosts net of tax benefits of these costs.
4. The additional costs wouldbe accounted for as fixed manufacturing overhead.
5. Elliott is currentlyoperating at full capacity and management believes they couldincrease sales to $6,000,000 at current prices if
they hadadditional capacity.
Elliott's current sales andcosts are as follows:
Sales	$4,500,000
Direct materials	780,000
Direct labor	1,540,000
Manufacturing overhead–variable	364,500
Manufacturing overhead–fixed	750,000
Selling expenses–variable	90,000
Selling expenses–fixed	250,000
Administrative expenses–variable	60,000
Administrative expenses–fixed	200,000
a. Prepare a CVP for Elliottbased on the current production.
d. Prepare a CVP based on theproposed equipment upgrade.