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A teddy bear factory uses two machines to produce teddy bears. The first machine is an old one that has a capacity of 30 teddy bears per season. Producing a teddy bear with it costs $3. The other machine also produces only 30 units per season but with lower unit cost of $2. Demand for teddy bears is perpetual, although it is seasonal . During winter season, the demand is high (60units) but during summer season low(30 units). Price is always the same -$4 per teddy bear. Currently the old machine is used only in Winter to meet the demand . That is a rational strategy as for now . Fortnately though there are new machines available on the market . Machine A with a capacity of 30 per season with unit cost of $1.5 , can be purchased for $500 . Machine B is more expensive to buy ($1,300) but has even lower unit cost of $1 and two time greater capacity . The manager of the factory plans to buy two machines A and scrap his old machines . Is it a good idea? What other options might be better? What is the profit-maximizing decision here? The opportunity cost of capital is 8%.

Basic Finance, Finance

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