In order to improve her service Molly is considering purchas

In order to improve her service, Molly is considering purchasing new dry-cleaning equipment, including a pressing machine that could substantially increase the speed at which she can dry-clean clothes and improve their appearance. The new machinery costs $16,200 installed and can clean 40 clothes items per hour (or 320 items per day). Molly estimates her variable costs to be $0.25 per item dry-cleaned, which will not change if she purchases the new equipment. Her current fixed costs are $1 ,700 per month. She charges customers $1 .1 0 per clothing item.

B.      If Molly purchases the new equipment, how many additional items will she have to dry-clean each month to break even?

Solution

First we need to calculate Molly`s monthly volume:

1700 / (1.1-0.25) = 2000

The $16200 will be broken into 36 months, which adds $450/month to Molly`s fixed costs, total of fixed cost would be $2150

2150 / (1.1-0.25)2000 = 529.412

Molly would need to clean an additional 529 items