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

Answer:

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

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%