You are hired as a consultant for Skater Boys Incorporated, a firm with over five years
experience in the skate board industry.Due to changing demand and a move to
environmentally friendly products, the company wishes to enter the market with a new ecofriendly finish on its skate boards. Based on your analysis of the company’s operations,
Skater Boys Inc has three main choices. After careful inspection of their current equipment
the company can spend $800 in refurbishment of their old equipment or make major
modifications to its operations at a cost of $1100. If these options are not taken, they can also
choose to purchase new equipment at a cost of $1800.
If the firm chooses to refurbish their existing equipment, materials and labour per skate board
will be $1.10 while a material and labour cost of $0.70 per board is associated with the major
modification choice. If however, the company chooses to buy new equipment, the associated
variable cost is estimated to be $0.40 per board.
You are required to do the following analysis
a. Use one diagram to show the cost associated with each decision.
b. Which alternative should Skater Boys Inc. choose if they think they can sell more than 3000 skate boards? Give an explanation for your answer.
c. Given the economic situation, you have advised Skater Boys Inc that the expected demand will be between 1000 and 2000 skates. Considering this new information, which alternative should the firm use?Is this the same alternative chosen for part (b) and explain why they may be the same or different?
d. If the actual demand for skate boards is 4500, how should Skater Boys Inc proceed?

b. The Skater Boys Inc. should purchase new equipment instead of refurbishing or modifying its old equipment. The total cost it incurs with the purchase of new equipment is much less than the other alternatives.

c. If expected demand is between 1,000 and 2,000 skates, Modifications of old equipment will be the best alternative.

It is not the same alternative chosen for part b. The reason for the difference is that the total cost for part b favors the purchase of new equipment, whereas, the total cost for part c favors the modifications of the old equipment.

d. If the actual demand is 4,500 skates, the Skater Boys Inc should purchase new equipment because the total cost is $3,600, far less than the total costs of the other alternatives.

Data and Calculations:

Refurbishment Modifications New Equipment

Fixed Cost $800 $1,100 $1,800

Variable cost $1.10 $0.70 $0.40

Assumed unit sales 3,000 3,000 3,000

Total variable costs $3,300 $2,100 $1,200

Total Fixed costs 800 1,100 1,800

Total costs $4,100 $3,200 $3,000

Refurbishment Modifications New Equipment

Expected demand 1,000 2,000 1,000 2,000 1,000 2,000

Total variable costs $1,100 $2,200 $700 $1,400 $400 $800

Fixed costs 800 800 1,100 1,100 1,800 1,800

Total costs $1,900 $3,000 $1,800 $2,500 $2,200 $2,600

Refurbishment Modifications New Equipment

Expected demand 4,500 4,500 4,500

Total variable costs $4,950 $3,150 $1,800

Total Fixed costs 800 1,100 1,800

Total costs $5,750 $4,250 $3,600

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