A Yellow Pages Directory company must decide whether to composetheir own ads or
ID: 1229267 • Letter: A
Question
A Yellow Pages Directory company must decide whether to composetheir own ads or pay an outside firm to do them. They can buy themoutside for $21.00 per ad. If they choose to do them inside, theywill have to do the following two things: 1) Buy computer hardwarefor $12,000 This equipment will last 3 years and have a salvagevalue of $2,000. 2) Hire an employee at an annual cost of $45,000per year. In addition to the two new fixed costs there will also bea $4.00 per ad variable cost if they choose to prepare their ownads. At 10% interest rate how many ads do they need to do annuallyto break even if they decide to prepare the ads themselves?
1,895 ads per year
2,895 ads per year
3,595 ads per year
3,895 ads per year
A Yellow Pages Directory company must decide whether to composetheir own ads or pay an outside firm to do them. They can buy themoutside for $21.00 per ad. If they choose to do them inside, theywill have to do the following two things: 1) Buy computer hardwarefor $12,000 This equipment will last 3 years and have a salvagevalue of $2,000. 2) Hire an employee at an annual cost of $45,000per year. In addition to the two new fixed costs there will also bea $4.00 per ad variable cost if they choose to prepare their ownads. At 10% interest rate how many ads do they need to do annuallyto break even if they decide to prepare the ads themselves?
1,895 ads per year
2,895 ads per year
3,595 ads per year
3,895 ads per year
Explanation / Answer
Answer 2,895 Ads Explanation Depreciable cost is 12,000 - 2,000 = 10,000 10,000 is for 3 yrs, so for 1 year 10,000 / 3 = 3,333 Interest for one year for the depreciable cost is 10,000 * 10% By looking into the present value table 10 % , 1 period is .909 so, 10,000*.909 = 909 Let X be the number of ads, then plug in the values and solve theequation as, 21 X = 45,000 + 3,333 + 909 + 4X 21X - 4X = 49,242 X = 49,242 / 17 = 2,896 ads
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