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The Krusty Krab produces 50,000 krabby patties each week. The equipment costs $5,000 and will remain...

The Krusty Krab produces 50,000 krabby patties each week. The equipment costs $5,000 and will remain productive for three years. The annual labor cost (SpongeBob) is $8,000.

a) Mr Krabs has the option of purchasing $10,000 of new equipment, with an operating life of five years. It would reduce labor costs to $4,000 per year. Should Mr Krabs purchase this equipment?

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Answer #1

Ans:

Option 1:

Equipment cost : $5,000

Life : 3 Years

Annual cost of equipment : $1,667

Annual cost of labor : $8,000

Total Annual Cost : $9,667

Option 2:

Equipment cost : $10,000

Life : 5 Years

Annual cost of equipment : $2,000

Annual cost of labor : $4,000

Total Annual Cost : $6,000

So Yes, Mr Krabs Should purchase this equipment.

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