Welding and Bending Ltd is dependent on their successful harrow for big gardens. The market knows this

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Question:

Welding and Bending Ltd is dependent on their successful harrow for big gardens. The market knows this product as Grid 1. Now it is time to have an upgrade focusing on improved quality and making the production process more efficient. As you see below there is a significant reduction in direct cost. As the consumer only will notice some cosmetically changes the new product will be named Grid 1n.

An effect of this change is that the need for quality inspections will diminish meaning that the total overhead will decrease from £150 000 to £100 000. The needed investment is £750 000 and the yearly volume of Grid 1 is 50 000 units. The economical lifetime for this investment is 5 years and at the end of year five, it is estimated that the new machinery can be sold for £100 000 and the present machine can be sold for £50 000 is replaced by the new one.

Below please find a cost breakdown per unit.

Based on a required return of 15% is this a viable option? Price: Grid 1£245,00 Grid 1n: £245,00 Direct Material: Grid 1: £125,00 Grid 1n: £123,00 Direct Labour: Grid 1: £55,00 Grid 1n: £54,00 Overhead: Grid 1: £10,00 Grid 1n: £9,00 Depreciation: Grid 1: £3,00 Grid 1n: £5,00 Margin: Grid 1: £52,00 Grid 1n: £54,00.