Spencer Inc. manufactures a product that costs $95 per unit plus $37,000 in fixe
ID: 2564866 • Letter: S
Question
Spencer Inc. manufactures a product that costs $95 per unit plus $37,000 in fixed costs each month. Spencer currently sells 1,000 of these units per month for $175 each. If Spencer leased a machine for $4,000 a month, it could add features to the product that would allow it to sell for $215 each. It would cost an additional $32 per unit to add these features. How much would Spencer's profit be affected if it leased the machine and added features to its product?
a)Increase $4,000
b)Decrease $4,000
c)Increase $37,000
d) Decrease $37,000
Explanation / Answer
Answer:
Spencer's profit if it leased the machine and added features to its product =a)Increase $4,000
Working notes for the above answer is as under
Incremental Revenue per Unit
(215-175)
40
Less:
Incremental Cost
additional Cost per unit
32
Incremental profit per unit
8
Multiplied by
Number of units sold
1000
Total Incremental Revenue
8000
Less: Leasing cost
4000
Increase in Spencer's profit
4000
Incremental Revenue per Unit
(215-175)
40
Less:
Incremental Cost
additional Cost per unit
32
Incremental profit per unit
8
Multiplied by
Number of units sold
1000
Total Incremental Revenue
8000
Less: Leasing cost
4000
Increase in Spencer's profit
4000
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