A company manufactures productXby operating two machines, each of which has a capacity of 5,000…

A company manufactures product X by operating two machines, each of which has a capacity of 5,000 units a year. Assume for simplicity that machines have infinite life and no salvage value. The cost of manufacturing one unit of the product is Rs 6. The demand is high between September to February, and machines work full capacity during this period. During March to July, the demand is low and machines work at 50% of capacity. The company is considering whether to replace these machines with available new designed machines. The new machines have the same capacity and therefore, two such machines would be needed to meet peak demand. Each new machine costs Rs 30,000 and lasts indefinitely. The cost of production would be Rs 3 per unit. Should the company buy new machines?

 

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