Question

E25-9 Describing and identifying information relevant to business decisions jective 1 Dan Jacobs, production manager for GreenLife, invested in computer-controlled pro- duction machinery last year. He purchased the machinery from Superior Design at a cost of $3,000,000. A representative from Superior Design has recently contacted Dan because the company has designed an even more efficient piece of machinery. The new design would double the production output of the year-old machinery but would cost GreenLife another $4,500,000. Jacobs is afraid to bring this new equipment to the company president's attention because he convinced the president to invest $3,000,000 in the machinery last year. Explain what is relevant and irrelevant to Jacobs's dilemma. What should he do?

Answer 1

Decision Making in business:

Issue: In this problem we are facing a decision to whether to purchase new machinery or not when we have already purchased a new machinery just a year ago.

Factors to focus on:

For arriving on any decision we have to focus on following factors,

Relevant:

1- Is it financially viable option to purchase new machinery?

2- What are the market demand of the products? Whether the proposed production can be consumed by the market?

3- What is the economic life of the Product and the machine?

4- If the Year old machine is replaced with the new machine, Can that old machine be used in any alternative course of business - May be used in additional production or production of any other product or may be rented to someone else.

5- If the machine has no alternative use, what salvage value the present machine will fetch?

6- We have to compare the outfolws and inflows in present value term?

7- Whether there will be a requirement of additional labour force, or the proposed machine will reduce the labour force?

8- Whether it will require new technological advancement and employee training?

9- What are the industry standards?

Irrelevant:

In Business decision making, focus is not on present only but on future as well. It may seem like there is an immediate cash outflow but we have to focus on whether that outflow adds more value and growth to business or it results in a loss in future incomes with respect to present outflow.

Conclusion:

Mr. Dan Jacobs should inform boards about the new technologically advanced machine. Board will conduct a feasibility study and will decide whether to exercise the option or not?