comm 354 sample midterm solution

37 years for payback or 505 235 recent 214 years for

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Unformatted text preview: costs. Should they buy the equipment or not? Explain with calculations? Purchase of equipment One time cost $9,100 vs. ongoing savings of $18 per unit Decision point in units $9,100 / 18 = 505 units What is a rough estimate of time to recover this upfront cost 505 / 213(average) = 2.37 years for payback, or, 505/ 235 (recent) = 2.14 years for payback The equipment also provides capacity for growth. Future benefit of the equipment under no growth is reach in just over two years. If there is growth up to 250 units the benefit increases as the savings would be a further 250-235 @ $18 = $270 per year. Should the company anticipate additional growth above 250 units this equipment would add value of: (300-250) @ ($300 – (128- 18)) - $900 = $10,400 per year If demand reaches 310 then the additional benefit would be (310 – 300) @ ($300 – (128-18)) - $900 = $1,000 per year Issues to consider What is the reliability of the $18 savings, how did Azor come up with this estimate? Environmentally there would be good PR… the decrease in waste and power usage could be promoted by Azor. Will this impact the quality of the product? Will this production change have any product implications, since this is a medical device for open heart surgeries? Prepared by J. Kroeker, 2011 © Sauder School of Business, UBC Page 2 Question 3 a) With no inflation adjustment, estimate the variable cost per crate High low chooses the two extremes in production volume to capture the most complete “view” of the data. In this case year 1 and 2 are not relevant since there was doubling of the fixed costs and thus, it is flawed to compare year 1 and year 8. The best years to use are years 3 and 8. 1,885,989 – 764,360 Rise = $1,121,629 Slope or variable cost is $208 9,979 – 4,587 Run = #5,392 b) With no inflati...
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