Elmwood, Inc. currently sells 13,100 units of its product per
year for $111 each. Variable costs total $86 per unit. Elmwood’s
manager believes that if a new machine is leased for $232,525 per
year, modifications can be made to the product that will increase
its retail value. These modifications will increase variable costs
by $14.50 per unit, but Elmwood is hoping to sell the modified
units for $141 each.
a-1. Should Elmwood modify the units or sell them as is?
Sell as is
Sell with modifications
a-2. How much will the decision affect
profit?
Amount =
b. What is the least Elmwood could charge for
the modified units to make it worthwhile to modify them?
(Round your answer to 2 decimal places.)
Minimum Selling Price =
c. The leasing company is willing to negotiate
the price of the machine lease. What is the most Elmwood would be
willing to pay to lease the machine if they plan to charge $141 for
the modified units?
Maximum Amount =
Contribution margin per unit before modification = Selling price per unit- variable costs per unit
= 111-86 =$25
After modification = 141-100.5 =$40.5
Gain from modifying units = Incremental contribution margin- Incremental costs
=(40.5-25)*13100 - 232,525
=-$29,475
I.e. loss
Hence, sell as is
B.Amount =$29,475
C.maximum amount for lease = Incremental contribution margin
=$203,050 per year
Elmwood, Inc. currently sells 13,100 units of its product per year for $111 each. Variable costs...
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