Question

In order to increase the profit margin for a certain product, a company is planning to purchase a custom-made machine for $5,000,000. it is anticipated that the introduction of the new machine will reduce the product's variable costs of labor and maintenance by $5.50 per unit and $.95 per unit, respectively. the product manager estimates that 500,000 units of the product will be manufactured and sold each year with a product life cycle of two years, at which time the machine will be discarded with no salvage value. what is the company's total cost savings over the product's life cycle? gaodun

Answer 1

Given that the company has to invest $5,000,000.00 custom-made machine with a life span of 2 years that will manufacture a total of 500,000 units in a year. Using the machine will reduce the costs in labor for $5.50/unit and maintenance for $0.95/unit, total of $6.45 per unit savings. For 2 years, the machine can manufacture a total of 1,000,000 units with total savings of $6,450,000.00 for both labor and maintenance. Since the machine's life is only 2 years with no salvage value, the company's total cost savings after the end of 2 years would be $1,450,000.00.