A manufacturing company wants to increase its production capacity by adding a ne

Question

A manufacturing company wants to increase its production capacity by adding a new machines. Two vendors have submitted their proposals. The machine from vendor A will have a fixed cost of $60,000 a year and a unit variable cost of $15. The machine from vendor B will have a fixed cost of $80,000 a year and a unit variable cost of $12. The machine will be used to manufacture a product and the unit selling price of the product $31. Which machine should the company buy if the demand of the product is 5000 units per year?

Explanation / Answer

Vendor A machine

Fixed Cost (FC) = 60000 $

Variable Cost (VC) = 15 $ per unit

Vendor B machine

Fixed Cost (FC) = 80000 $

Variable Cost (VC) = 12 $ per unit

Selling Price (SP) = 31 $ per unit

Demand = 5000 units per year

Machine A proft = Revenue - (FC+VC) = 31*5000 - (60000+15*5000) = 20000 $

Machine B profit =Revenue - (FC+VC) = 31*5000 - (80000+12*5000) = 15000 $

The company should buy machine A which gives a profit of 20000 $ for the given demand.

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