Question

AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.50 per unit and a selling price of $1.00 per unit. Fixed costs are $14,000. Current sales volume is 30,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $6,000. Variable costs would increase to $0.75, but sales volume should jump to 80,000 units due to a higher-quality product. a. What is the current profit and proposed profit of the sales of AudioCables?

Answer 1

Answer:

Current Profit $1,000

Proposed Profit $0

Explanation:

Current Profit:

Sales (30,000 units * $1.00) = $30,000

Variable Cost (30,000 units * $0.50) = $15,000

Fixed cost = $14,000

Profit = Sales - Variable cost - Fixed cost

Current profit = $30,000 - $15,000 - $14,000

Current Profit = $1,000.

Proposed Profit:

Sales (80,000 units * $1.00) = $80,000

Variable Cost (80,000 units * $0.75) = $60,000

Fixed cost = $14,000 + $6,000

Profit = Sales - Variable cost - Fixed cost

Proposed profit = $80,000 - $60,000 - $20,000

Proposed Profit = $0