Lennon Hearth Products manufactures glass-door fireplace screens that have two types of mounting brackets for the frame. An L-shaped bracket is used for relatively small fireplace openings and a Ushaped bracket is used for all others. The company includes both types of brackets in the box with their product and the purchaser discards the one not needed. The cost of these two brackets with screws and other parts is $3.50. If the frame of the fireplace screen is redesigned, a single universal bracket can be used that will cost $1.20 to make. However, initial costs of retooling ($6000) and inventory writedowns ($8000) will be incurred immediately. If the company sells 1200 fireplace units per year, should the company keep the old brackets or go with the new ones, assuming the company uses an interest rate of 15% per year and it wants to recover its investment in 5 years. Use the present worth method for your evaluation.
Lennon Hearth Products manufactures glass-door
fireplace screens that have two types of mounting
brackets for the frame. An L-shaped bracket is used
for relatively small fireplace openings and a Ushaped
bracket is used for all others. The company
includes both types of brackets in the box with their
product and the purchaser discards the one not
needed. The cost of these two brackets with screws
and other parts is $3.50. If the frame of the fireplace
screen is redesigned, a single universal bracket can
be used that will cost $1.20 to make. However, initial
costs of retooling ($6000) and inventory writedowns
($8000) will be incurred immediately. If the
company sells 1200 fireplace units per year, should
the company keep the old brackets or go with the
new ones, assuming the company uses an interest
rate of 15% per year and it wants to recover its investment
in 5 years. Use the present worth method
for your evaluation.
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