A clothing company would like to purchase a new piece of equipment and has been debating the purchase of either (a) a new sewing machine that would improve the existing department or (b) an embellisher that would afford the company the opportunity to add new and unique clothing to their existing lines. They gathered the following prospective information: Which machine choice yields the highest profit margin and by how much? (Do not round intermediate calculations.)
A) The embellisher has a 2.12% higher profit margin than the sewing machine.
B) The embellisher has a 5.39% higher profit margin than the sewing machine.
C) The sewing machine has a 2.12% higher profit margin than the embellisher.
D) The sewing machine has a 5.39% higher profit margin than the embellisher.

Question

A clothing company would like to purchase a new piece of equipment and has been debating the purchase of either (a) a new sewing machine that would improve the existing department or (b) an embellisher that would afford the company the opportunity to add new and unique clothing to their existing lines. They gathered the following prospective information:  Which machine choice yields the highest profit margin and by how much? (Do not round intermediate calculations.)
A) The embellisher has a 2.12% higher profit margin than the sewing machine. 
B) The embellisher has a 5.39% higher profit margin than the sewing machine. 
C) The sewing machine has a 2.12% higher profit margin than the embellisher. 
D) The sewing machine has a 5.39% higher profit margin than the embellisher.

Quizplus · Accepted Answer

This question requires the formula for calculating Profit Margin: Operating Income divided by Sales. After calculating this figure for each machine, compare them to determine which has the highest profit margin. The operating expenses for each are incomplete, so calculate the depreciation expense. Sewing Machine: $3,420/10 years = $342 per year. Total Operating Expenses = $902 + $342 = $1,244. Embellisher: $4,808/8 years = $601. Total Operating Expenses = $1,176 + $601 = $1,777. Now, calculate profit margin for each. Sewing Machine: ($5,430 - $1,244)/$5,430 = 0.7709. Embellisher: ($6,280 - $1,777)/$6,280 = 0.7170. Now, compare the two: 0.7709 - 0.7170. The sewing machine has a 0.0539 or 5.39% higher profit margin than the embellisher (Choice D).

A Clothing Company Would Like to Purchase a New Piece