In: Accounting
Elmwood, Inc.
currently sells 12,800 units of its product per year for $108 each.
Variable costs total $83 per unit. Elmwood’s manager believes that
if a new machine is leased for $208,000 per year, modifications can
be made to the product that will increase its retail value. These
modifications will increase variable costs by $16.00 per unit, but
Elmwood is hoping to sell the modified units for $138 each.
a-1. Should Elmwood modify the units or sell them
as is?
Sell as is | |
Sell with modifications |
a-2. How much will the decision affect profit?
amount -
b. What is the least Elmwood could charge for the
modified units to make it worthwhile to modify them? (Round
your answer to 2 decimal places.)
minimum selling price-
c. The leasing company is willing to negotiate the
price of the machine lease. What is the most Elmwood would be
willing to pay to lease the machine if they plan to charge $138 for
the modified units?
maximum amount-
A1 & A2 | Incremental Revenue(138-108)*12800 | 3,84,000.0 | ||||
Less: Incremental Variable Cost (16*12800) | 2,04,800.0 | |||||
Incremental Income due to Modification | 1,79,200.0 | |||||
Less: Leased Machine Cost | 2,08,000.0 | |||||
Net Loss due to Modification | -28,800.0 | |||||
B | Leased Machine Cost | 2,08,000.0 | ||||
Add: Variable Cost (16*12800) | 2,04,800.0 | |||||
Total Required Revenue | 4,12,800.0 | |||||
Units | 12,800.0 | |||||
Additional Revenue PU over Current | 32.25 | |||||
Normal Revenue PU | 108.00 | |||||
Additional Revenue PU over Current | 32.25 | |||||
Total Revenue-Minimum | 140.25 | |||||
C | Maximum amount would be Incremental Income due to Modification i.e 179200 above | |||||