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. Additional equipment as well as opening in more locations should be considered in making the decision to expand the business.

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

3. No.

4. Still the company after barring input costs is getting a profit of $100,000. Hence it will not have a much impact on printing company.

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