A manufacturing company operates using an old machine with an annual operating cost of $200,000 and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A manufacturing company operates using an old machine with an annual operating cost of $200,000 and annual sales revenue of $250,000. The manager considers purchasing a new machine that is designed by an engineering company to improve the product's quality which could increase the sales revenue. The price of the new machine is $150,000 and its annual operating cost is 10% higher than the old machine. Based on the information obtained from its market research, the company will have four possible scenarios in using the new machine: (i) high success where annual sales revenue will be 50% higher than using the old machine; (ii) fair success where annual sales revenue will be 35% higher than using the old machine; (iii) low success where annual sales revenue will be 25% higher than using the old machine; (iv) loss where annual sales revenue will be 20% lower than using the old machine. The probabilities of the high, fair, and low success rates of using the new machine are 20%, 35%, and 25%, respectively. The manufacturing company consider two options. The first option is to purchase the new machine outright. Alternatively, it can hire the new machine on a trial basis for one year at a cost of $75,000, and, at the end of Year 1, the company can choose to purchase the machine at the full price or it can return it to the vendor (the engineering company). a) Analyse the above scenario using a decision tree diagram based on the potential profits generated over four years period. Assume no discounted values over the four years period. Explain the calculation in every node of the tree diagram, and identify the best and worst possible scenarios in terms of profit or loss from using the new machine. (4 marks). b) Based on the decision tree diagram analysis, offer a recommendation to the company in making the decision. Are there any other factor(s) that the company needs to consider other than the potential profit or loss in making the decision? (1 mark) A manufacturing company operates using an old machine with an annual operating cost of $200,000 and annual sales revenue of $250,000. The manager considers purchasing a new machine that is designed by an engineering company to improve the product's quality which could increase the sales revenue. The price of the new machine is $150,000 and its annual operating cost is 10% higher than the old machine. Based on the information obtained from its market research, the company will have four possible scenarios in using the new machine: (i) high success where annual sales revenue will be 50% higher than using the old machine; (ii) fair success where annual sales revenue will be 35% higher than using the old machine; (iii) low success where annual sales revenue will be 25% higher than using the old machine; (iv) loss where annual sales revenue will be 20% lower than using the old machine. The probabilities of the high, fair, and low success rates of using the new machine are 20%, 35%, and 25%, respectively. The manufacturing company consider two options. The first option is to purchase the new machine outright. Alternatively, it can hire the new machine on a trial basis for one year at a cost of $75,000, and, at the end of Year 1, the company can choose to purchase the machine at the full price or it can return it to the vendor (the engineering company). a) Analyse the above scenario using a decision tree diagram based on the potential profits generated over four years period. Assume no discounted values over the four years period. Explain the calculation in every node of the tree diagram, and identify the best and worst possible scenarios in terms of profit or loss from using the new machine. (4 marks). b) Based on the decision tree diagram analysis, offer a recommendation to the company in making the decision. Are there any other factor(s) that the company needs to consider other than the potential profit or loss in making the decision? (1 mark)
Expert Answer:
Related Book For
Posted Date:
Students also viewed these accounting questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Jan Flenderson, marketing manager at Awesome Bits Games (ABG), was starting to get worried. The Kickstarter crowdfunding campaign for the latest company board game, Undead Rising, had gone live at 3...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
The comparative balance sheets for 2018 and 2017 and the income statement for 2018 are given below for Arduous Company. Additional information from Arduous's accounting records is provided also....
-
Two new rides are being compared by a local amusement park in terms of their annual operating costs. The two rides are assumed to be able to generate the same level of revenue (and thus the focus on...
-
Calculate the first eight terms of the sequence of partial sums correct to four decimal places. Does it appear that the series is convergent or divergent? E sin n n-1
-
Kruger Designs hired a consulting firm three months ago to redesign the information system used by the architects. The architects will be able to use state-of-the-art CAD programs to help in...
-
At the end of 2014, Frontier Corporation has $360,000 of cumulative temporary differences that will result in reporting future taxable amounts as follows. 2015 ......... $105,000 2016 .........90,000...
-
Grey Company purchased a new van for floral deliveries on April 1, 2019. The van cost $48,000 with an estimated life of 6 years and $6,000 residual value at the end of its useful life. The...
-
If you construct a bond portfolio with five 6% coupon (semiannual payment), duration of 2.79 years, 3-year maturity bond sells at par ($1,000) and six 1-year zero coupon bond sells for $950. (a)...
-
Water Nation is considering purchasing a water park in Fort Worth, Texas, for $1,900,000. The new facility will generate annual net cash inflows of $490,000 for eight years Engineers estimate that...
-
Define lead time.
-
A 2011 survey by the Society for Human Resource Management found that 43 percent of employers offer cross-training of some kind to help workers become more proficient in tasks not related to their...
-
What are the assumptions underlying the economic order quantity?
-
What are ordering costs? Provide some examples.
-
Japanese management and manufacturing techniques focus on principles like close supplier relationships, just-in-time deliveries and zero defects. Many western companies have implemented such...
-
ABC Corporation uses customers served as its measure of activity. During February, the company budgeted for 36,700 customers, but actually served 27,300 customers. The company uses the following...
-
7. FALSE DILEMMA 8. GANDWAGON Definition: Fallacy example: How to revise argument: Definition: Fallacy example: How to revise argument:
-
Define vertical, horizontal, and conglomerate mergers and describe the economic effects of each.
-
How long will it take a payment of $500 per quarter to amortize a loan of $8,000 at 16% compounded quarterly? Approximate your answer in terms of years and months. How much less time will it take if...
-
Tutak Industries issued a $1,000 face value bond a number of years ago that will mature in eight years. Similar bonds are yielding 8%, and the Tutak bond is currently selling for $1,291.31. Compute...
-
Prepare the operating budget, the financial budget, and the supporting schedules.
-
Distinguish between operating and financial budgets.
-
Follow the principal steps in preparing a master budget.
Study smarter with the SolutionInn App