company A plans to purchase a packaging machine worth 5 million to further fast and up the packaging of their product brand X. the purchase is intended to boost up the loosing sale of the said product which makes 10000 per year. the target of the company is to increase the sale by 20%. will this be a good decision a for the company considering the concept of marginal cost and benefits? why or why not?
To determine whether the purchase of the packaging machine is a good decision for Company A, we need to consider the concept of marginal cost and benefits.
Marginal cost refers to the additional cost incurred from producing one more unit of a product, while marginal benefits represent the additional revenue generated by producing one more unit. In this case, the marginal cost would be the cost of purchasing the packaging machine, which is $5 million.
To calculate the marginal benefit, we need to find the additional revenue expected from increasing the sales of product X by 20%. Currently, the product generates a revenue of $10,000 per year.
Increasing the sales by 20% means the new revenue would be $10,000 + (20% * $10,000) = $12,000 per year. Therefore, the marginal benefit would be $12,000 - $10,000 = $2,000 per year.
Now, let's evaluate the decision:
1. Marginal cost: The cost of purchasing the packaging machine is $5 million.
2. Marginal benefit: The additional revenue generated by increasing the sales is $2,000 per year.
If the marginal benefit (annual revenue increase of $2,000) exceeds the marginal cost (cost of $5 million), then it would not be a good decision for the company, as the additional revenue generated may not be sufficient to cover the cost of the packaging machine.
However, if the marginal benefit exceeds the marginal cost, then it would be a good decision for the company.
In this case, the marginal benefit ($2,000) is significantly low compared to the marginal cost ($5 million). Therefore, based on the concept of marginal cost and benefits, it does not appear to be a good decision for Company A to purchase the packaging machine, as the expected additional revenue would not be enough to cover the high cost of the machine.