A Company Is Currently Buying a Part at a Cost

question 12

Multiple Choice

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.

• A) 8,000 units
• B) 2,558 units
• C) 3,198 units
• D) 12,792 units

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Definitions:

Fixed Cost Financing

A financing strategy where the costs remain constant regardless of the level of production or sales.

Future Cash Flows

Expected cash receipts and payments a business anticipates receiving or paying out over a future period.

Bias

A preconception or inclination towards something, potentially leading to unfair judgments or decisions in various contexts.

Incremental Overhead

The additional indirect costs incurred due to a change in business activities, such as an increase in production volume.