Question

x Company must replace one of its current machines with either Machine A or Machine B. The useful life of Last year, X Company sold 64,200 units of its only product for $18.00 each. Total costs were as follows: both machines is seven years. Machine A costs $50,000, and Machine B costs $63,000. Estimated annual cash flows with the two machines are as Cost of goods sold Variable $483,426 follows: 131,610 Fixed Machine Machine Selling and Year A. administrative 1 $-6,000 $-7,000 Variable $70,620 Fixed 2 -8,000 -4,000 92,448 -8,000 -3,000 At the end of the year, a company offered to buy 4,500 units of the product but only for $11.00 each. X Company had the capacity to produce the additional units, and even though there would have been no additional selling and administrative costs, it rejected 4 -8,000 -3,000 6,000 3,000 -2,000 6 5,000 -4,000 7 -2,000 the offer 5. If X Company had accepted the special order, firm If X Company buys Machine B instead of Machine A, what is the payback period (in years)? profits would have increased by 1N 2 6Tries 0/3 BAN S 9 Tries 0/3

Answer 1

If the company is having the capacity to produce additional units, then anything received more than variable cots will gain the company
In the given case, without increase in any Fixed Costs and Selling and Administrative Expenses ,company can produce the units.
So, Let us first calculate the variable Manufacturing cost per unit and if their price is more than that, we can take up the offer
Variable Manufacturing Costs for 64200 units is 483426
So, per unit = 483426/64200 = $7.53/unit
Since the special offer is more than the relevant cost of $ 7.53, company should have accepted the offer.
Had the company accepted the order, it could have earned ($11-$7.53)*4500 = $15615
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