The owner of a small printing company is considering the purchase of additional

Question

The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low.

Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business?

If the owner is optimistic about the company’s future sales, should the company expand by purchasing the equipment?

Is the owner’s optimism or pessimism about sales the only factor that may impact the company’s profits?

The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?

Explanation / Answer

The other option available with the owner other than purchasing the additional equipment is leasing or hire purchasing the additional equipment considering the level of sales in the near future and the amount of risks fortaken by the owner. Also, the lease rentals and interest rates should be considered and compared. the more profittable option should be chosen.

If the owner is optimistic about the company's future sales, then

Profit if equipment is not purchased = $ 70,000

Profit if equipment is purchased = $ 90,000

Moreover, even if the sales level are low the projected profits would not reduce to a greater extent if the equipment is purchased. Hence, the equipment should be purchased if the owner is optimistic about the company's future sales.

No, the other market factor's should also be taken into consideration for example the useful life of the equipment, the alternatives available in the market. Hence,the owner’s optimism or pessimism about sales is not the only factor that may impact the company’s profits.

The company may both suffer a loss or receive a profit in the useful life of 5 years of the equipment. It is more likely that the company would receive a greater profit as the margin between the alteratives is less.Moreover, the sales keep fluctuating in the 5 years time.

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