PROBLEM NO. 16: A company proposes to install a machine for the manufacture of a component which at being purchased at Rs. 24 each. There are two alternatives, namely (a) installation automatic machine and (b) installation of a semi-automatic machine. The details of machines are as under: present is of an the two Particulars Initial cost of the machine Life of machine Fixed overheads other than depreciation on machine (p.a.) Variable expenses of the component Semi-automatic Machine Automatic Machine Rs. 6,00,000 10 years Rs. 84,000 Rs. 9,00,000 10 years Rs. 1,62,000 Rs. 15 Rs. 12 The company charges depreciation on straight line method. Scrap value of the machine at the end of the life is nil. The demand for the components at present is 20,000 units per annum. Ihis demand is expected to increase to 40,000 units. Required- (a) For each of the two volumes of output namely 20,000 and 40,000 units, state with supporting calculations whether the components should be purchased or manufactured by installation of machine. If your decision is in favour of installation of machine, which model will you advise? (b) At what volume of output should the company change over from purchase of components to manufacture by installation of (i) semi-automatic machine and (ii) automatic machine. (c) At what volume of manufacture of the components will the company switch over from installation of one type of machine to the other? Ch. 6- Decision Making 15