Question

Golf Accessories Ltd. manufactures golf gloves which sell for an average price of $16.00. Currently, the company employs a number of workers to make the leather gloves, such that variable costs are $12.50 per glove, and the company’s total fixed costs are $350,000 per year. Derry Cale, the owner, is evaluating the acquisition of a new machine which will sew the leather gloves on an automated basis. If the owner acquires the machine, total fixed costs per year will increase to $575,000 but variable costs per glove will be reduced to $11.25 per unit. The owner is interested in the new machine but not if the Break-Even point for the company’s sales for this particular glove would be increased by more than 25%. If the estimates are accurate about total fixed costs and variable costs per unit, What would be the Break-Even point with the new machine? Would it make sense to acquire the new machine if the owner’s company can easily sell at least 150,000 gloves per year? A) 116,842 units; Yes, because the Break-Even point would be increased by less than 25%. B) 121,053 units; No, because the Break-Even point would be lower. C) 121,053 units; Yes, because EBIT would be higher if sales keep growing. D) 125,876 units; No, because the new machine would reduce the Break-Even point. E) 275,921 units; Yes, because machine-made gloves are significantly superior to hand-sewn gloves, so sales would probably increase not decrease.

Answer 1

Solution 2 Before Acquisition of new machine 3) 1 = = = Selling price per units $16.00 Variable lost per unit = $ 12.50 Fixed cost = $ 350,000 sales = Break - Even level of fixed cost Selling prie per unit - Variable cost per unit z $ 350,000 $16- $19.50 $ 350,000 $ 3.50 2 100,000 unit After acquisition of new machine - Fixed cost $575,000 Variable cost - $11.25 per unit Selling price per unit = $16.00 per unit Break Even level of sales = fixed lost Selling Price per unit - Variable lost per unit = $ 575,000 $16.00 - $11.25

= $575,000 $ 4.75 = 121,052.63 = 121,053 (approx) - units so the right option is c) 121,053 units. Qs Would it make sense to acquire the new machine if owner's company can easily sell at leas: gloves per year ? Anse K) Yes, because EBIT would be higher if sales keep growing.