Plymouth Corp. sells units for $100 each. Variable costs are $75 per unit, and fixed costs...

Plymouth Corp. sells units for $100 each. Variable costs are $75 per unit, and fixed costs are $200,000. If Plymouth leases a new machine, fixed costs will increase by $60,000 a year, but production will be more efficient, saving $5 per unit. At what level of production will Plymouth be indifferent between leasing and not leasing the new machine?

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Expert Solution

Number of units to be produced to be indifferent between leasing or not leasing new machine would be 12,000.

Calculation of number of units to be produced:

Particulars	Amount
Existing Variable Cost per unit	75.00
Since, Variable cost will reduce by $5 per unit after leasing new machine; therefore new variable cost per unit will be $70 ($75 - $5)	70.00
Increase in margin ($75 - $70)	5.00
Increase in Cost after leasing the new machine	60,000.00
Therefore, number of units to be produced to be indifferent between leasing or not leasing new machine would be = Increase in cost after leasing new machine / increase in margin per unit = $60000 / $5 = 12,000	12,000.00

ekkarill92 answered 1 year ago

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