(Capacity Utilization) HiTek Industries spends $20,000 per year on Component A. NewIdea Co. has a product that can be used instead of Component A, and it would cost HiTek $30,000 per year, compared to HiTek?s current costs for Component A of $20,000 per year. NewIdea believes that it can justify the additional price through productivity improvements.
NewIdea?s sales representative visits HiTek and is able to determine that HiTek has a maximum capacity of 25,000 units per year. The sales price is $100 per unit and the contribution margin is 30%. HiTek has currently been experiencing a 7.5% scrap rate and a 7.5% downtime rate. NewIdea?s product is expected to reduce scrap to 5% and downtime to 5%.
a. Produce a financial justification that will support NewIdea?s proposal, assuming that NewIdea?s products will reduce the downtime and waste to the target levels.
b. If you received such a proposal from NewIdea, what would you want to be sure of before accepting it?
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Sep 21, 2019EXPERT
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