A company is currently buying a part at a cost of $12 each. It is considering buying a machine that will produce the part at a variable cost of $8. Each unit of input produces the part plus a by-product, which is sold for $1. The machine will cost $40,000 and will have a useful life of 5 years. The company requires an 8% return. What annual volume is necessary to justify making the investment? Ignore income taxes.

Question

Quizplus · Accepted Answer

The correct answer is A.The annual volume necessary to justify making the investment is 2,558 units. This is calculated by dividing the initial investment cost of $40,000 by the annual savings of $4 per unit ($12 - $8 + $1).

A Company Is Currently Buying a Part at a Cost