An electronics manufacturer is considering the purchase of o

An electronics manufacturer is considering the purchase of one of two types of laser trimming devices. The sales forecast indicated that at least 8,000 units will be sold per year. Device A will increase the annual fixed cost of the plant by $20,000 and will reduce variable cost by $5.60 per unit. Device B will increase the annual fixed cost by $5,000 and will reduce variable cost by $3.60 per unit. If variable costs are now $20 per unit produced, which device should be purchased?

Solution

Profit = Sales - (FC + VC)

Device A:

FC = $20,000

VC = $20 - $5.60 = $14.40

Units sold = 8,000

Profit = Sales - (FC + VC)

        = Sales - (20,000 + 14.40 * 8000)

        = Sales - 135,200

Device B:

FC = $5,000

VC = $20 - $3.60 = $16.40

Units sold = 8,000

Profit = Sales - (FC + VC)

        = Sales - (20,000 + 16.40 * 8000)

        = Sales - 151,200

It is evidend from the above calculation the cot involved in device is less. Therefore, device A should be purchased.