Salamanca SA manufactures filing cabinets in two operations: machining and finishing. Additional information is as follows.
Each cabinet sells for €72 and has direct materials costs of €32 incurred at the start of the machining operation. Salamanca has no other variable costs. Salamanca can sell whatever output it produces. The following requirements refer only to the preceding data; there is no connection between the situations.
1. Salamanca is considering using some modern jigs and tools in the finishing operation that would increase annual finishing output by 1000 units. The annual cost of these jigs and tools is €30000. Should Salamanca acquire these tools?
2. The production manager of the Machining Department has submitted a proposal to do faster set-ups that would increase the annual capacity of the Machining Department by 10000 units and cost €5000 per year. Should Salamanca implement the change?