Levcon produces a variety of filters for automotive and industrial use. They pro
ID: 2423674 • Letter: L
Question
Levcon produces a variety of filters for automotive and industrial use. They produce 23 different sizes of automotive filters, which have a total annual sales of 50,000 units worldwide (summed over all sizes). Assume demand for each filter size is equally distributed across sizes. Assume that it costs Levcon an average of $2 to produce a filter. The firm uses an interest rate of 22 percent annually as a measure of its internal rate of return. The cost to reset and recalibrate the equipment in order to initiate a production run for a different sized filter is currently $80. Management estimates that this can be reduced to $40 by improving changeover procedures, but estimates that the cost of this reduction is $2,000 per year. Can the firm justify the $2,000 investment?
Explanation / Answer
Answer: Yes, the firm should justify the $2000 investment.
Because Management estimates that this can be reduced to $40 by improving changeover procedures.So Total saving in cost by implementing this is $2000000 (50000*40).
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.