The owner of a small printing company is considering the purchase of additional

Question

The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low.

Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business?

If the owner is optimistic about the company’s future sales, should the company expand by purchasing the equipment?

Is the owner’s optimism or pessimism about sales the only factor that may impact the company’s profits?

The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?

Explanation / Answer

1. Since the addition of new equipment may lead to decrease in minimum profit value from $50,000 to $40,000, the printing company can consider the reduction of the operational or management cost. This will not add any cost to the company, whereas by improvising the operation by automation and quality control techniques will reduce the cost and increase the overall profit. There could be other alteratives to reduce the cost and maximise the profit such as increase the efficiency of machine and manpower by training, reducing the input material cost etc.

2. Yes, If the owner is optimistic about the company’s future sales, the company should expand by purchasing the equipment since the projected profit in case of high expected sale is higher ($90,000) than the profit ($70,000) if company does not procure the machine. Optimism will make comapny think of high sales not the low sales. And, this high sales will indicate high profit by buying the machine relative to the case of not buying the machine.

3. Yes! If the owner is optimistic then machine will be bought as stated in above point2. If pessimism prevails, owner will think of low sales and low relative profit in case of buying machine. Thus, he will not buy.

4. This will decide the break even point (BEP) for the company. If they attain the BEP within span of 5 years then it is worth spending on machine; otherwise not.

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