A domestic producer of baby carriages, Pramble, buys the wheels from a company in the north of England. Currently the wheels cost $4 each, but for a number ofreasons the price will double. In order to produce the wheels themselves, Pramblewould have to add to existing facilities at a cost of $800,000. It estimates that its unitcost of production would be $3.50. At the current time, the company sells 10,000carriages annually. (Assume that there are four wheels per carriage.)a. At the current sales rate, how long would it take to pay back the investmentrequired for the expansion?b. If sales are expected to increase at a rate of 15 percent per year, how long willit take to pay back the expansion?
A domestic producer of baby carriages, Pramble, buys the wheels from a company in the north of England. Currently the wheels cost $4 each, but for a number of
reasons the price will double. In order to produce the wheels themselves, Pramble
would have to add to existing facilities at a cost of $800,000. It estimates that its unit
cost of production would be $3.50. At the current time, the company sells 10,000
carriages annually. (Assume that there are four wheels per carriage.)
a. At the current sales rate, how long would it take to pay back the investment
required for the expansion?
b. If sales are expected to increase at a rate of 15 percent per year, how long will
it take to pay back the expansion?
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