Question

In: Accounting

Kendra’s Quilts makes custom baby quilts embroidered with the baby’s name and date of birth. The...

Kendra’s Quilts makes custom baby quilts embroidered with the baby’s name and date of birth. The company is considering the purchase of a new embroidery machine that costs $75,000. The increased efficiency of the new machine would allow the company to increase revenue by 50%, from $250,000 to $375,000 annually. Direct labor costs would increase by $15,000, and fixed costs (not including depreciation on the machine) would increase by $12,500. Factory rent is $12,000 per year. Should the company purchase the machine?

  • A  : Yes, because profit would increase by $10,500.

    B  : Yes, because profit would increase by $22,500.
  • C  : No, because profit would decrease by $10,000.

  • D  : No, because profit would decrease by $17,500.

Solutions

Expert Solution

Solution:
CALCULATION OF THE INCREAMENTAL REVENUE
Amount in $
Addittional Revenue ( $ 375,000 - $ 250,000) $                   125,000
Less: Increamental Cost
Increase in Direct Labor $                     15,000
Increase in fixed Cost $                     12,500
Increase in Factory Rent $                     12,000
Purchase of Equipment $                     75,000
Total Addittional Cost (B) $                   114,500
Total Addittional Revenue (A- B) $                     10,500
Answer = Option A : Yes, because profit would increase by $10,500

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