Question

Reliable is debating whether to add 2 million units or 1.5 million units of capacity to the Asia plant. The larger plant increase will cost $18 million, whereas the smaller addition will cost $15 million. Assume that Reliable users a discount factor of 10 percent. What do you recommend?

Answer 1

Step-by-step explanation:

10% of 18 million =1.8 million for 2 million units

10% of 15 million =1.5 million for 1.5 million units

For 2 million units at 10 percent discount you would spend

18 million -1.8 million= 16.2 million

For 1.5 million units at 10 percent discount you would spend

15 million -1.5 million = 13.5 million

You have a shortfall of 500 000 units between spending 16.2 million and 13.5 million.

My strong recommendation will be to use $15 million.