Brantford Bat Company (BBC) manufactures popular baseball bats that are prized by professional
and amateur players. The current flexible cost of manufacturing the bat is $ 1 2
per unit. The cost of operating the lathe that produces the bat is about $600,000 per year.
This cost includes maintenance and physical obsolescence costs.
BBC is now evaluating the possibility of purchasing a new lathe to manufacture the
bat. The new lathe replaces the mechanical patterns currently used to manufacture lathes
and relies instead on direct laser sensing by a computer within the lathe to compare the
current size of the wood stock being turned on the lathe with a pattern stored in the computer'
s memory. Although the new machine would not increase the capacity of the batmaking
operation, which is 750,000 bats per year, it would reduce the flexible cost of producing
the bats to $ 1 0 per unit. The cost of operating the new lathe would be about
$ 1 ,400,000 per year.
If the current level of production and sales of this bat is 500,000 units, should the
new lathe be purchased? Ignore the effect of income taxes in answering this question.