A Shop Wants to Increase Capacity by Adding a New

question 3

Multiple Choice

A shop wants to increase capacity by adding a new machine. The firm is considering proposals from vendor A and vendor B. The fixed costs for machine A are $90,000 and for machine B, $75,000. The variable cost for A is $15.00 per unit and for B, $18.00. The revenue generated by the units processed on these machines is $22 per unit. If the estimated output is 9,000 units, which machine should be purchased?

• A) machine A
• B) machine B
• C) either machine A or machine B
• D) no purchase because neither machine yields a profit at that volume
• E) purchase both machines since they are both profitable

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Definitions:

Capital Loss Carryforward

The process of applying net capital losses to future tax years to reduce taxable income, subject to limitations.

Net Capital Loss

The result when the total capital losses from investments exceed the total capital gains in a tax year.

Net Capital Gain

The profit from the sale of an asset or investment, subtracted by any losses from sales in the same tax year.

AMT

Short for Alternative Minimum Tax, a parallel tax system designed to ensure that individuals and corporations pay at least a minimum amount of tax.