Lennon Hearth Products manufactures glass-door fireplace screens that have two types of mounting brackets for the frame. An L-shaped bracket is used for relatively small fireplace openings and a U-shaped bracket is used for all others. The company includes both types of brackets in the box with their product and the purchaser discards the one not needed. The cost of these two brackets with screws and other parts is $3.50. If the frame of the fireplace screen is redesigned, a single universal bracket can be used that will cost $1.20 to make. However, initial costs of retooling ($6000) and inventory write-downs ($8000) will be incurred immediately. If the company sells 1200 fireplace units per year, should the company keep the old brackets or go with the new ones, assuming the company uses
an interest rate of 15% per year and it wants to recover its investment in 5 years. Use the present worth method for your evaluation.
What will be an ideal response?
PWold = -1200(3.50)(P/A,15%,5)
= -4200(3.3522)
= $-14,079
PWnew = -14,000 – 1200(1.20)(P/A,15%,5)
= -14,000 – 1440(3.3522)
= $-18,827
Keep old brackets
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