Question

King Karaoke makes karaoke machines for personal and commercial use. The production manager wants to replace an old assembly machine with a newer model. He believes the new model will allow them to reduce fixed and variable costs by 8%. The new machine has a value of $130,000 and the old machine is valued at $35,000. Current sales are $600,000 with a contribution margin of 59% and fixed costs of $98,000. Average operating assets before purchase of the new machine are $4,000,000. Should the company upgrade their assembly machine? Why or why not?

Answer 1

yes the company should upgrade their assembly maching because the ROI increased by 0.52%

Step-by-step explanation:

details new machine old machine

cost $130,000 $35,000

sales revenue $600,000 $600,000

constribution margin 59% 59%

contribution $354,000 $354,000

fixed costs $90,160 $98,000

profit $263,840 $256,000

variable costs $246,000 $246,000

For new machine:

ROI = (Gain from investment - cost of investment)/cost of investment

= [263,840 - 130,000]/130,000

= 1.03

for old machine:

ROI = (Gain from investment - cost of investment)/cost of investment

= [256,000 - 35,000]/35,000

= 6.31

difference = 6.31 - 1.03

= 5.28

percentage of increase = 5.28/1.03*100 = 512.62%

therefore, the ROI increase by 0.52%