Bruce€™s Bakery is thinking of making its own Danish pastries. Two machines, A and B, are being considered for purchase. Bruce€™s now purchases the Danish pastries from an outside supplier for 20 cents each. The cost information for producing the pastries would be:

Required:
1. At a sales volume of 275,000 pastries per year, which of these alternatives is best€”buying the pastries, using machine A, or using machine B? (Ignore the time value of money, and assume straight-line depreciation.)
2. At what level of production would you be indifferent between machine A and machine B? Which machine is preferable if production exceeds thisvolume?

Transcribed Image Text:

Machine A Ș0.16 Machine B Variable costs per Danish pastry Annual fxed costs Initial cost of machine S0.14 $3,500 S10,000 SO $5,000 $24,000 S8,000 Salvage value at end of five years. Estimated life of machine 5 years 5 years