Question

"1. AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $.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 $.60, but sales volume should jump to 50,000 units due to a higher-quality product. Should AudioCables buy the new equipment?"

Answer 1

Answer:

No.

Explanation:

Current profit of AudioCables, Inc without buying new equipment

Current Profit = Current sales volume * Selling price per unit - Fixed cost - Current sales volume * Variable cost per unit

= 30,000 * $1.00 - $14,000 - 30,000 * $0.50

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

= $1,000

So, the current profit of AudioCables, Inc., without buying new equipment is $1,000

Proposed profit of AudioCables, Inc after buying new equipment

Proposed Profit = Proposed sales volume * Selling price per unit – Fixed cost after buying new equipment - Proposed sales volume * Variable cost per unit after buying new equipment

= 50,000 * $1.00 - $20,000 – 50,000 * $0.60

= $50,000 - $20,000 - $30,000

= $0

So, the proposed profit of AudioCables, Inc., after buying new equipment is $0

Conclusion: As the profit of AudioCables, Inc., will reduce after buying new equipment from $1,000 to $0, therefore AudioCables should not buy the new equipment.