A machine that is used in an industrial process to make a certain product has an

Question

A machine that is used in an industrial process to make a certain product has an initial cost of $50,000 and it is expected to have a zero salvage value. The maximum capacity of this machine is 7,000 units per year, and its life is estimated to be 4 years. The unit variable cost (raw material, energy, etc.) is $12.40, the total fixed annual cost of supervision and taxes is $20,000. The company uses 15% interest compounded annually. If the machine operates at 50 percent maximum capacity: a) Calculate the average unit cost and annual total cost b) Calculate the incremental production cost.

Explanation / Answer

a.

n = 4 years

R = 15%

Let, annual equivalent cost of the machine is EAC.

Thus,

Initial cost = EAC*(1-1/(1+R)^n)/R

50000 = EAC*(1-1/1.15^4)/.15 = EAC*2.855

EAC = 50000/2.855= $17513.14

Now,

Annual fixed cost = EAC of the machine + annual cost of supervision and taxes

Annual fixed cost = 17513.14 + 20000 = $37513.14

Since, machine can only be operated at 50% capacity. Thus, only 3500 units can be produced.

Variable cost per unit = $12.4 per unit

Total variable cost = 3500*12.4 = $43400

Thus,

Annual total cost = total fixed cost + total variable cost = 37513.14 + 43400

Annual total cost = $80913.14

Average unit cost = 80913.14/3500 = $23.12 per unit

Average unit cost = $23.12 per unit

b.

incremental product cost is computed when capacity of the machine is increased and new production cost is identified. Then, incremental cost is identified. But, this information regarding the new level of production is not given in the question.

For any clarification, pl. send your comment to improve the answer of part b.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.