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Question

1. A startup landscaping company has to determine the most prudent investment in new trucks and mowers. They narrow their choice to two sets. Which set will be better given that money is worth 7.25%?

Capital Required---------Set I---------Set II
Initial cost ($)-----------68,000---------65,000
Life span (years)---------12------------11
Maintenance ($)---------5,000---------4,500
Residual value ($)---------7,000---------6,000

 

2. Steve is opening a small wood shop to build custom mailboxes. He has the following costs:
             Fixed cost: $3,000 a month
            Wages for two assistants who work 40 hours a week,
                 40 weeks a year earning $12 an hour

            Material: $10 per box
            Handling: $1.00 per box
If he sells his boxes at $30 each, calculate the shop’s:
(a) Contribution margin
(b) Break-even quantity
(c) Break-even revenue
(d) Break-even quantity and revenue if he wants to make $5,000 in profit
Also draw the break-even graph.

 

Answer 1

Hey Jasmine -- for 1. the differences in life, maintenance, and residual are so small compared to the initial outlay, start by looking at the $3000 savings at the start ... 7% money doubles every 10 years ... so do we want another $6k after 11 years or get the 12-yr life from Set I? As a business person, it's a toss-up -- especially when life, maint, and resid are very tentative estimates. I choose the money saved NOW with SET II over the supposed extra life and resid of SET I.

 

If the life & resid were a lot different, then a calculation might be worthwhile -- finance academics may disagree, but I'm a businessman looking for pretty-sure BIG differences, not hoped-for small ones.

 

For 2. Look at a 1st year ... FC 3k, Wage 40k, Box margin $30 minus $11 = $19 ... better sell more than 2200 boxes to break even for $66k revs  ... to profit $5k @$19/box, build another 300 boxes ==> 2500 boxes Q, $75k R, 43k+27.5k COST, ~$5k profit ... Best regards, ma'am :)