a. The associated costs of each decision are as follows:
<u>Refurbishment</u> <u>Modifications</u> <u>New Equipment</u>
Variable cost $1.10 $0.70 $0.40
Expected unit sales 3,000 3,000 3,000
Total variable costs $3,300 $2,100 $1,200
Total Fixed costs 800 1,100 1,800
Total costs $4,100 $3,200 $3,000
b. The Skater Boys Inc. should <em>purchase</em><em> new equipment</em> instead of <em>refurbishing or modifying</em> its old equipment. The total cost it incurs with the purchase of new equipment is <u>much less</u> than the other alternatives.
c. If expected demand is between <u>1,000 and 2,000 skates</u>, Modifications of old equipment will be the best alternative.
It is not the same alternative chosen for <em>part b</em>. The reason for the difference is that the total cost for <em>part b</em> favors the purchase of new equipment, whereas, the total cost for<em> part c</em> favors the modifications of the old equipment.
d. If the actual demand is 4,500 skates, the Skater Boys Inc should purchase new equipment because the total cost is $3,600, far less than the total costs of the other alternatives.
Data and Calculations:
<u>Refurbishment</u> <u>Modifications</u> <u>New Equipment</u>
Fixed Cost $800 $1,100 $1,800
Variable cost $1.10 $0.70 $0.40
Assumed unit sales 3,000 3,000 3,000
Total variable costs $3,300 $2,100 $1,200
Total Fixed costs 800 1,100 1,800
Total costs $4,100 $3,200 $3,000
<u>Refurbishment</u> <u>Modifications</u> <u>New Equipment</u>
Expected demand 1,000 2,000 1,000 2,000 1,000 2,000
Total variable costs $1,100 $2,200 $700 $1,400 $400 $800
Fixed costs 800 800 1,100 1,100 1,800 1,800
Total costs $1,900 $3,000 $1,800 $2,500 $2,200 $2,600
Refurbishment Modifications New Equipment
Expected demand 4,500 4,500 4,500
Total variable costs $4,950 $3,150 $1,800
Total Fixed costs 800 1,100 1,800
Total costs $5,750 $4,250 $3,600
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