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10. Elmwood, Inc. currently sells 12,000 units of its product per year for $100 each. Variable costs total $75 per unit. Elmwood's manager believes that if a new machine is leased for $147,000 per year, modifications can be made to the product that will increase its retail value. These modifications will increase variable costs by $20 per unit, but Elmwood product that wil increase its retail value. These modifications will increase variable costs by $20 per unit, but Elmwood is hoping to sell the modified units for $130 each a. Should Elmwood modify the units or sell them as is? How much will the decision affect profit? ( points)

Explanation / Answer

With new machine

Elmwood should not modify the units as the total cost increased to $1,287,000 (1,140,000 + 147,000) from $900,000 and profits have decreased from 300,000 to 273,000. So the decision of modification should not be considered and the product should be produced and sold with the old method of production.

the profit will fall down by $27000 ( $300,000 - $273,000).

Sales              12,000 Sales price $              100 Total sales $     1,200,000 Variable cost @$75            900,000 Gross income with old sales $        300,000

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