Red Wolf Dyers and Printers, Inc. buy a new dyeing machine with an expected life

Question

Red Wolf Dyers and Printers, Inc. buy a new dyeing machine with an expected lifetime of two (2) years for $120,000.00. Its annual production capacity is 1,000,000 yards, the variable manufacturing costs for the products on this machine are $0.50 per yard, and the annual fixed costs that can be allocated to this product are $40,000.00. What is the minimum price the company must charge for the dyeing services in order to not run a loss? Select one O a. S/yd. 0.12 b.S/yd. 0.60 c. S/yd. 0.66 O d. S/yd. 0.10 O e. S/yd. 0.62

Explanation / Answer

In order to avoid any losses, the unit must recover fixed costs per yard along with its variable costs

Depreciation allocation of equipment assuming no salvage value

= (Purchase cost – Salvage value) / Useful life in production units

Production units in 2 years

= Production per year x Number of years

= 1,000,000 yards x 2

= 2,000,000 yards

So, Depreciation per yard

= ($120,000 – 0) / 2,000,000

= $0.06 per yard

Fixed cost per yard

= Fixed cost per year / Production per year

= $40,000 / 1,000,000

= $0.04 per yard

Variable cost per yard

= $0.50

So, Total cost which should be recovered in order to avoid any loss

= $0.06 + $0.04 + $0.50

= $0.60

So, as per above calculations, option b is the correct option

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