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15 May, 09:56

Plymouth Corp. sells units for $100 each. Variable costs are $75 per unit, and fixed costs are $200,000. If Plymouth leases a new machine, fixed costs will increase by $60,000 a year, but production will be more efficient, saving $5 per unit. At what level of production will Plymouth be indifferent between leasing and not leasing the new machine?

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  1. 15 May, 09:59
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    12,000 units

    Explanation:

    The computation of the level of production is shown below:

    Since the variable cost is reduced by $5 so new variable cost is $70 so there is an margin of $5

    And, there is an increase in fixed cost i. e $60,000

    So, the level of production is

    = An increase in fixed cost : Margin per unit

    = $60,000 : $5

    = 12,000 units
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