Reference no: EM132889430

Pioneer Manufacturing Corp has regularly been selling out its complete stock of its most popular style of men's stocks. The production and marketing managers have investigated ways to increase capacity and have determined they could produce another 250,000 pairs annually if they bought equipment costing P1,200,000. The equipment has a five-year life with no salvage value. Pioneer Co. uses straight line depreciation. The equipment would add P200,000 to annual cash fixed costs. The socks sell for P4 and have a variable cost of P1 per pair. The variable cost would not be affected by using equipment. The managers are confident of selling 200,000 additional pairs annually. Cost of capital is 14% and the tax rate is 40%.

Required:

Problem 1) Determine whether Pioneer Co should acquire the equipment.

Problem 2) Suppose that additional volume is likely to be 250,000 pairs. Determine whether Pioneer Co. should acquire the equipment. Justify.