The Rinaldi Company is considering the purchase of a machine at a cost of $800,000 to manufacture a new product. The machine has an estimated useful life of 8 years and no salvage value. It is expected that the machine will produce from 80,000 to 100,000 units of the product per year and that all units will be sold at $10 each. Costs other than those related to the machine are as follows:

The machine would occupy space now standing empty and with no intended use.
Fixed costs allocated to the space are $12,000 per year. The following costs are related to the machine. (The company uses straight-line depreciation.)

Write a memorandum to management stating whether the company should purchase the machine and produce the new product. In reaching your decision, use each of the analytical methods presented in this chapter. Show all calculations.

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Materials Labor $5 per unit 1 per unit Variable overhead 1 per unit