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.

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

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

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

4. 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

1. Yes. Marketing should be improved to raise sales which increase profit and ensures higher revenue.

Also quality of the product should be better than any other competititve product.

2) If owner is optimistic then owner expects higher sales.

projected profit is 20000 more than without purchase hence purchase is advised.

3) No. A scientific decision can be taken from past analysis and regression equations predicting sales can be obtained.

Also from the market trend prob of high or low sales to be considered.

4) If life is 5 years increase in profit for the total of 5 years with net present value should be atleast equal to the cost of the new equipment. Then only the equipment is to be purchased.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.