7. Suppose you own a specialized auto parts manufacturer. You purchase and have
ID: 1169445 • Letter: 7
Question
7. Suppose you own a specialized auto parts manufacturer. You purchase and have installed a new machine to make a particular type of part. The price of the machine plus installation is $300,000. Once the machine is purchased and installed it has no resale value, but it does not wear out. Other costs of making the parts are $200 per unit.
Suppose you are able to make and sell 1000 units at $225 each. Let the market rate of interest be 10%.
(a) If you have already purchased the machine, should you go ahead and make and sell the 1000 units or should you close your operation?
(b) If you have not yet purchased the machine and anticipate selling only 1000 at a price of $225, should purchase the machine and produce?
(c) Is there a difference in your answers to (a) and (b)? Explain.
Explanation / Answer
(a) If I have already purchased the machine, I will go ahead and sell 1000 units as per unit selling price of $225 is higher than the other costs of $200 per unit. So it will generate profit of $25 per unit or $25,000 in total which will reduce my losses of machine buying at $300,000
(b) I will not purchase the machine, as it costs $300,000 or $300 per unit which is lower than the selling price of $225 per unit.
(a) If I have already purchased the machine, I will go ahead and sell 1000 units as per unit selling price of $225 is higher than the other costs of $200 per unit. So it will generate profit of $25 per unit or $25,000 in total which will reduce my losses of machine buying at $300,000
(b) I will not purchase the machine, as it costs $300,000 or $300 per unit which is lower than the selling price of $225 per unit.
c. yes, there is difference in the answers. As in first case, I have only made the purchase of machine, so now I can only cover some of the costs of buying machine by selling 1000 units at $25 gain per unit. In the other case, as I have not purchased the machine yet, i will be better off not buying as cost per unit of $300 is higher than the price.Related Questions
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