Question
thank you! Blank Co. owns a machine that automatically produces 1,000 Freeloaders annually for a variable cost per piece of $8.00, and Blank sells each
thank you!
Blank Co. owns a machine that automatically produces 1,000 Freeloaders annually for a variable cost per piece of $8.00, and Blank sells each Freeloader for $13.00.The machine was purchased in the year 2000 for $110,000 for an estimated life of tenyears or 10,000 Freeloaders. At the time of being put into use, it was estimated that themachine would sell for $10,000 at the end of its useful life. Blank has beencharging depreciation using the Units of Production method.After the machine had been in operation for 5 full years, producing 1,000 Freeloadersannually as expected, Blank gets an offer from an outside vendor to supply 1,000Freeloaders annually for five years at $9 a piece. Were Blank to outsource thesupply of Freeloaders to this vendor, it could do one of two things with its existing machine: it could either (A) repurpose it to make Freeriders (instead of Freeloaders) forthe rest of its useful life, for a variable cost of $10.00 a piece and sell 500 of themannually, each for $12.00; OR (B) it could keep the machine idle for a while and sell itanytime in the next five years for a Loss on Sale of $44,900.What should Blank do? [Ignore income taxes and time value of money.]
1. Blank should outsource the machine as doing so ha sthe potential to increase total profit over the next 5 years by how much?
2. Now assume that blanks Loss on Sale of the old machine is $45,100 (instead of$44,900 as in Option B above), then Blank should outsource the machine as doing so has the potential to increase its total profit over the next 5 years by how much?
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