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?

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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