Office furniture - Solution I If the company buys the...

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PRACTICE WORK Capacity planning A large company that makes office furniture is considering offering a new line of chairs. To make the chairs the company must buy a new machine. Initial investigation reveals that there are two companies offering the machine. Company A has priced the machine at $500,000. With this machine, the cost of material, labor etc. is estimated to be $100 per chair. Company B offers a similar machine at a price of $750,000. The cost of material and labor is estimated at $75 per chair. Regarding pricing the chairs, marketing believes it can sell 5,000 chairs if the price is $400 each and 7,000 chairs if the price is $350 each. If the company wants to maximize profit, which machine should the company buy and what should be the price of a chair?
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Unformatted text preview: Solution I If the company buys the machine from Company A at a price of $500,000: (a) If the price of the product is $400/chair: Profit = ($400) (5,000) - { $500,000 + (5,000)($100) } = $2,000,000 - {$500,000 + $500,000 } = $1,000,000 (b) If the price is $350/chair Profit = ($350) (7,000) - { $500,000 + (7,000)($100) } = $2,450,000 - {$500,000 + $700,000 } = $1,250,000 II If the company buys the machine from Company B at a price of $750,000: (a) If the price of the product is $400/chair: Profit = ($400) (5,000) - { $750,000 + (5,000)($75) } = $2,000,000 - {$750,000 + $375,000 } = $875,000 (b) If the price is $350/chair Profit = ($350) (7,000) - { $750,000 + (7,000)($75) } = $2,450,000 - {$750,000 + $525,000 } = $1,175,000...
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Office furniture - Solution I If the company buys the...

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