a) Assume that you are offered a new piece of equipment for $10,000. The equipme
ID: 444173 • Letter: A
Question
a) Assume that you are offered a new piece of equipment for $10,000. The equipment will produce 10,000 units per year with a margin of $6.00 per unit. Demand for the product being produced has been 2,000 units per year. Your current equipment is fully depreciated and can produce the 2,000 units per year at but at a margin of only $4.00 per unit. Should you purchase or not purchase the new equipment and if so, under what conditions?
b) A manufacturer has identified the options for acquiring a machined part. It can make the part on a numerically controlled lathe for $150 per unit (including materials.) It can make the part on a standard lathe for $250 per unit (also including materials.) It can make the part on a machining center for $50 per unit (also including materials.) The manufacturer can acquire a standard lathe for $10,000. It could acquire a numerically controlled lathe for $100,000. A machining center would cost $350,000. It has also found that it can purchase the part for $350 per unit. Advice the manufacture as to which option is best for him and under what conditions?
Explanation / Answer
a.
Margin earned by old equipment = $4 per unit
Margin earned by new equipment = $6 per unit
Net additional gain in margin earned by new equipment = 6-4 = $2 per unit
Annual demand= 2000 units
Total net additional gain in margin = 2000*2 = $4000 / year
Time to cover $10000 price of new equipment= 10000 / 4000 = 2.5 years
Thus,
New equipment can been purchased if and only if:
Also, old machine is already fully depreciated and useful life is consumed. Thus, buying a new equipment will be a wise decision, following above mentioned conditions.
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