In order to improve her service, Molly is considering purchasing new dry-cleanin

Question

In order to improve her service, Molly is considering purchasing new dry-cleaning equipment, including a pressing machine that could substantially increase the speed at which she can dry-clean clothes and improve their appearance. The new machinery costs $16,200 installed and can clean 40 clothes items per hour (or 320 items per day). Molly estimates her variable costs to be $0.25 per item dry-cleaned, which will not change if she purchases the new equipment. Her current fixed costs are $1 ,700 per month. She charges customers $1 .1 0 per clothing item. volume is 2000.

Molly estimates that if she purchases the new equipment and lowers her price to $0.99 per item, her volume will increase to about 4,700 units per month. Based on the local market, that is the largest volume she can realistically expect. What should Molly do?

Explanation / Answer

based on the given explanation it is better to purchase the new machine.

with the present numbers her revenues (forget the fixed cost) are= 2000*1.10= $2200

the fixed cost is1700+ variable cost (2000*0.25)

= 1700+500= 2200

she is at break even level.

with the new machine her revenues are going to be

4700*0.99= $4653, and the variable cost will be= 4700*0.25= 1175

she will have aditional amount of= 4653 - (1175+1700)= $1778

so, going with new machine is suitable. ofcourse she will recover her investment in one year. later she will enjoy the profits

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