Question

AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.50 per unit and a selling price of $1.40 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 50,000 units due to a higher-quality product.
What is the current profit and proposed profit of the sales of AudioCable?

Answer 1

Answer:

Current is 13k, proposed is 12.5k

Explanation:

30,000 units at $1.40 = 42,000$ in sales

Cost of Goods and Sales = (30,000x0.50)+14,000$ = 29,000$

Current Profit = 42,000-29,000=13,000$

If we improve:

50,000 units at 1.40$ = 70,000$ in sales

COGS = (50,000x0.75$)+14,000$+6,000$=57,500

Proposed Profit = 12,500$