Question

You are hired as a consultant to decide if your client should purchase a new, highly specialized piece of equipment. The product to be produced by this equipment is forecast to have a total worldwide demand of 15,000 units over the entire product life. The initial investment to acquire and install the equipment is $256,000. The variable cost to produce each unit will be $15, and the selling price for the finished product will be $30. Which of the following best describes the situation the firm is facing?
All of these
The company's total margin will be less than its investment.
The company will recover its initial investment.
The break-even is lower than the 15,000 units that are expected to sell.
It is a good investment.

Answer 1

Answer:

Given:

Demand = 15,000

Initial investment = $256,000

Variable cost = $15

Selling price = $30

Here, we'll first compute break-even quantity :

i.e. $Initial \: investment + variable \: cost \times Quantity_{break\:even} = Quantity_{break\:even} \times selling price$

$256,000 + 15 \times Quantity_{break\:even} = Quantity_{break\:even} \times 30$

$Quantity_{break\:even} = 17,067 units$

From above we can state that the demand is less than break-even quantity i.e. in this case the organization will not be able to recover the investment made.

Therefore, the company's total margin will be less than its investment.  

The correct option is (b)