In: Accounting
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.
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 | ||