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

ekkarill92 answered 1 year ago

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