Abel Ltd is contemplating the lease of a new machine for the manufacture of the company's...
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Abel Ltd is contemplating the lease of a new machine for the manufacture of the company's single product for the coming year. The company is also in the process of deciding the price to charge for this product in order to maximise profits. In the year just ended, the results of the company were as follows: Sales (220,000 units) Less: Cost of goods sold Production wages - fixed Materials piecework Gross profit Less: Royalties (£0.60 per unit sold) Less: Administration (fixed cost) £000 40 100 140 440 132 50 £000 660 580 80 182 (102) Loss The company expects the fixed production wages, fixed administration costs and the royalty rate to remain unchanged. However, the piecework rate will increase to £0.60 per unit. Quality control indicates that the current machine is causing high wastage of materials. A new machine has now become available and it is expected to reduce material usage by 50%. The machine cannot be bought but can be leased for £100,000 per annum. The company estimates that if selling price was reduced by £0.01, demand for the product would increase by 1,000 units per annum. Required: Advise Abel Ltd whether the new machine should be leased for the coming year and the price that should be charged for the company's product in order to maximise profits. Abel Ltd is contemplating the lease of a new machine for the manufacture of the company's single product for the coming year. The company is also in the process of deciding the price to charge for this product in order to maximise profits. In the year just ended, the results of the company were as follows: Sales (220,000 units) Less: Cost of goods sold Production wages - fixed Materials piecework Gross profit Less: Royalties (£0.60 per unit sold) Less: Administration (fixed cost) £000 40 100 140 440 132 50 £000 660 580 80 182 (102) Loss The company expects the fixed production wages, fixed administration costs and the royalty rate to remain unchanged. However, the piecework rate will increase to £0.60 per unit. Quality control indicates that the current machine is causing high wastage of materials. A new machine has now become available and it is expected to reduce material usage by 50%. The machine cannot be bought but can be leased for £100,000 per annum. The company estimates that if selling price was reduced by £0.01, demand for the product would increase by 1,000 units per annum. Required: Advise Abel Ltd whether the new machine should be leased for the coming year and the price that should be charged for the company's product in order to maximise profits.
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In order to maximise profits Abel Lid should lease the new machine and reduce the selling pric... View the full answer
Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
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