A domestic producer of baby carriages, Pramble, buys the wheels from a company i

Question

A domestic producer of baby carriages, Pramble, buys the wheels from a company in the north of England. Currently the wheels cost $4 each, but for a number of reasons the price will double. In order to produce the wheels themselves, Pramble would have to add to existing facilities at a cost of $800,000. It estimates that its unit cost of production would be $3.50. At the current time, the company sells 10,000 carriages annually. (Assume there are four wheels per carriage.) a. At the current sales rate, how long would it take to pay back the investment for the required expansion? b. If sales are expected to increase at a rate of 15% per year, how long will it take to pay back the expansion?

Explanation / Answer

Currently the wheels cost $4 each to buy.
double rate= 8$
unit cost of production would be $3.50
difference: 8-3.50=4.50$
let the stroller has 4 wheels
so, annual saving by making the wheels= 10000*4.5$*4
= 180000$
total investment= 800000
payback time= 800000/45000= 4.44 years.
if , sales are to increase at rate of 15% per year,
in the same way calculate the componud payback time,
which whold come around 2.5 years.

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