Smooth Lines Pen \& Ink (SLaP) produces one style and collar of pens-black tubular pens. SLaP 4,800,000 pens per year, but its relevant range is 3,600,000 to 6,000,000. Below is a cost I ne ractory is being aepreciated over 40 ycars using a straignt-ime metnod. Ine estimated residual value for depreciation purposes is 0 . The factory has 10 machines used to produce pens. They have an estimated life of 10 years. The estimated residual value for depreciation purposes is 0. 1. A salesman has come to the company with a new fangled super-duper pen machine. The machine costs $218,000 and can make 5,000 pens a day - twice the capacity of the current pen machines. The new pen machine has an expected useful life of 4 years. Should the company buy the new machine? Yes or No and explain your answer or show your work. (HINT: See Questions #2 \& #3 below spending too much time on \#I) 2. What other information would be relevant to you for answering question above? 3. Here is some additional information. Your old machines can be sold today for $33,000a piece. In another 4 years your current machines could be sold for scrap of $2,000 a piece. Factory worker labor will be reduced by $38,400 per year for each new machine that is purchased and replaces 2 old machines. The new machine can be sold in 4 years for scrap of $5,000. Do you buy the new machine? [Do your analysis as if you are deciding to buy just one new machine to replace 2 old machines]. 4. Does your answer above change if have to borrow money to buy the new machine and your total interest charges over the life of the loan will be $5,000 ? Why or why not, explain your answer. 5. Ignoring the facts above, you are now presented with a new dilemma. A local company has come to ask you whether you would produce some special monographed pens for them. They realize you have some extra capacity. They want you to produce 600,000 pens a year for them, and they want them in blue. Thus, you will incur costs to flush your machines of black ink and insert blue (and back to black) of $220,000 a year, which is on top of your other normal expenses. They will pay you $1.00 per pen. Do you make them? If yes, how much do you make from taking this special order? If not, what is the minimum you would charge to make the pens? 6. What is one is an alternative to flushing machines between black and blue pens? 7. Now suppose, that they will accept black pens, but they will only pay $0.70 per pen. Do you make the pens? What is the minimum you would charge? What are some qualitative issue that Smooth Lines should consider before cither accepting or rejecting the special order
