Answer:
Part (a) Should the firm buy the new equipment
The Firm Should not Buy the New Equipment since there is No Profit ( instead $1000 Profit lost) from this decision and is in a worse off position than before.
Part (b) should the company buy the new equipment and increase the selling price?
The Firm Should Buy the New Equipment since an incremental Profit of $ 1500 is expected from this decision.
Explanation:
Part (a) Should the firm buy the new equipment
Do Not Buy Buy New Equipment
$ $
Sales 30,000 50,000
Less Variable Cost 15,000 30,000
Contribution 15,000 20,000
Less Fixed Costs 14,000 20,000
Net Income 1,000 0
The Firm Should not Buy the New Equipment since there is No Profit ( instead $1000 Profit lost) from this decision and is in a worse off position than before.
Part (b) should the company buy the new equipment and increase the selling price?
Do Not Buy Buy New Equipment
$ $
Sales 30,000 49,500
Less Variable Cost 15,000 27,000
Contribution 15,000 22,500
Less Fixed Costs 14,000 20,000
Net Income 1,000 2,500
The Firm Should Buy the New Equipment since an incremental Profit of $ 1500 is expected from this decision.
