A supermarket chain buys loaves of bread from its supplier at $0.55 per loaf. The chain is considering two options to bake its own bread.**Table: Comparison of Machines for Bread Baking**| | Machine A | Machine B ||------------------|-----------|-----------|| Capital investment | $9,000 | $14,500 || Useful life (years) | 8 | 8 || Annual fixed cost | $2,000 | $4,500 || Variable cost per loaf | $0.24 | $0.18 |Neither machine has a market value at the end of eight years, and the Minimum Attractive Rate of Return (MARR) is 15% per year. What is the minimum number of loaves that must be sold per year to justify installing Machine A instead of buying the loaves from the supplier?

Minimum order quantity for an Investment is the one, at which cost of an investment meets the present value of annual earning. In short, Break Even Point is the point of sale at which Cost of Investment is equal to Profit from investment.With details as follow: Sale Price of bread loaves $0.55 - Variable Cost $0.24 Contribution per bread $0.31 Assuming Annual Sales Quantity X X Total Contribution on Sale $0.31X - Annual Fixed Cost $2,000 Net Annual Earning $0.31X - $2,000 Present Value of Annuity Factor (15%,8) 4.48732 Total Earning over the period ($0.31X - $2,000) 4.48732 Note: As the value of Machine at the end of the period will be 0. And taking depreciation on machine as per Straight Line Method. Depreciation =Cost of MachineLife of the Machine=$9,0008=$1,125 But the depreciation effect in not taken in the problem as the information of tax is not available. The depreciation charge brings tax benefit of the firm. Therefore, depreciation is unaccounted above. MARR is used as discounting rate of return. Cost of Machine = Present Value of Annual Benefit of Machine A$9,000 =$0.31X-2,000×4.48732$9,000 =1.39107X-8974.641.39107X=9000+8974.64X=$17,974.641.39107=12,921.45 or 12,922 Hence, the minimum number of loaves that must be sold per year to justify installing the Machine A instead of buying the loaves from the supplier are 12,922

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What is the minimum number of loaves that must be sold per year

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

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