I have a 1987 F-150 Extended Cab LWB 4X4 and it currently has the stock 3 speed auto in it. I was wonder what are my options to get a newer OD transmission that will bolt in without to much trouble. Additionally it had the 351W/4bbl set up.

 

A newer OD transmission would be computer controlled, the only way it would work would be with a stand alone controller. The AOD, not a newer transmission, would work but they aren't a really strong transmission. You must have the good C6 transmission now. Sometimes MODS or updates aren't practical.

 

The stand alone computer and harness for an E4OD , which is the C6 with overdrive costs about 5 to 600. You may also have to mess with the crossmember and driveshafts plus you would have to convert to cable shift. Gets a little complicated and pricey by the time you're done.
If you do go with an AOD, don't get one of the early ones (87?) as the first version had some oiling problems internally.

 

Would changing the gearing in the rear end be the easier choice to drop the rpm's for gas mileage?

 

You have a 4X4 so you would have to change the gearing in both the front and the rear axles. What do you have for differential gearing now? If you don't know check for a little tin plate on one of the differential cover bolts, or decode the sticker on the door panel.

Probably the simplest change would be an AOD transmission. But again it won't be as tough as the C6 transmission you probably have in there now. Do you do any heavy towing?