Elmwood, Inc. currently sells 12,800 units of its product per year for $108 each. Variable costs...

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-

Solutions

Expert Solution



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

ekkarill92 answered 1 year ago

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