Question

Answer the following multiple-choice questions. You have to select the correct option and provide a complete correct solution.

Q1. a. A supermarket chain buys loaves of bread from its supplier at $0.5 per loaf and sells them at $0.75 per loaf. The chain is considering two options to bake its own bread. Capital investment Useful life (Years) Annual fixed costs Machine A $8,000 7 $2,000 Machine B $12,000 7 $3,500 Neither machine has a market value at the end of seven years, and MARR is 10% per year. If the demand for bread at this supermarket is 20,000 loaves per year, what strategy should be adopted for acquiring bread? i. Continue buying from the supplier iii. Install Machine B ii. Install Machine A iv. Install both Machine A and Machine B

Answer 1

Correct Answer:

ii. Install machine A

Working note:

Cost incurred in buying 20000 loaves of bread = 20000*.5 = $10000

R = 10%

AW for the machine A = 8000*(A/P, 10%, 7) + 2000

AW for the machine A = 8000*.2054 + 2000

AW for the machine A = $3643.2

===

Now,

AW for the machine B = 12000*(A/P, 10%, 7) + 3500

AW for the machine B = 12000*.2054 + 3500

AW for the machine B = $5964.8

Since both the machines A and B have annual cost (AW) that is less than $10000 paid to the supplier to acquire 20000 loaves of bread, so both machines can bring benefits to the company. But, it is machine A that is more cost effective. So, machine A should be acquired.