Bettys and Co. manufactures product X which it sells for $5 per unit. Variable costs of production are currently $3 per unit. A new machine is available which would cost $90,000 but which could be used to make product X for a variable cost of only $2.50 per unit. However, when the company decides to invest in this new machine, it would increase its fixed costs by $7,500 a year as a direct result of purchasing the machine. The machine would have an expected life of four years and a resale value after that time of $10,000. Sales of product X are estimated to be 75,000 units a year. 

i. If Bettys and Co expects to earn at least 12 % a year from its investments, should the machine be purchased?

ii. Without doing any calculation, what will be the expected rate of return from an investment in this new machine?

Answer rating: 100% (QA)

i Statement showing Net benefit from purchasing the m... View the full answer