Office furniture

# 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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## This note was uploaded on 04/09/2010 for the course GSC 3600 taught by Professor Verma during the Winter '10 term at Wayne State University.

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

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