5. Great State Bank needs a new check sorting machine and is considering two bra
ID: 388509 • Letter: 5
Question
5. Great State Bank needs a new check sorting machine and is considering two brands, Vandine and Murcheck. The Vandine machine is highly automated and would have an annual fixed cost of $8,500 and a variable cost of $35 per sort. The Murcheck machine is less automated, requiring more employee time, with an annual fixed cost of $7,000 and a variable cost of $55 per sort. The bank performs only one sort per day, and operates 248 days each year, Use break-even analysis to analyze this problem. a. Compute the total annual cost for each machine. Based only on annual cost, which machine is preferred? b. For how many sorts per year would the bank be indifferent between the two machines? What other factors should be considered when making this decision? c.Explanation / Answer
a. Total annual cost of Vandine Machine = Annual Fixed cost + variable cost per sort * number of sorts per year
Where,
Annual Fixed cost = $8,500
Variable cost per sort = $35 per sort
Number of sorts per year = number of sorts per day * number of days machine operates per year
= 1* 248 = 248 sorts
Therefore
Total annual cost of Vandine Machine = $8,500 + $35 * 248
== $8,500 + $8,680
= $17,180
Total annual cost of Murcheck Machine = Annual Fixed cost + variable cost per sort * number of sorts per year
Where,
Annual Fixed cost = $7,000
Variable cost per sort = $55 per sort
Number of sorts per year = number of sorts per day * number of days machine operates per year
= 1* 248 = 248 sorts
Therefore
Total annual cost of Murcheck Machine = $7,000 + $55 * 248
== $7,000 + $13,640
= $20,640
Based on total annual cost Vandine Machine will be preferred as it has lower total annual cost.
b. Assume that at X number of sorts bank will be indifferent to having two machines
Therefore $8,500 + $35 * X = $7,000 + $55 * X
Or X = $1,500/$20 = 75 sorts per year
If the number of sorts is 75 per year then the bank will be indifferent in two machines.
c. The other factors that bank should consider in their decision making is cost of labor as one machine requires more employee time in comparison of other.
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