Question

An electronics firm is currently manufacturing an item that has a variable cost of $ 0.50 per unit and a selling price of $ 1.10 per unit. Fixed costs are $ 15 comma 000. Current volume is 30 comma 000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $ 6 comma 000. Variable cost would increase to $ 0.60​, but volume should jump to 50 comma 000 units due to a​ higher-quality product. Based on the given​ information, the decision should be to add new equipment ​, since the profit with the new equipment is ​$ nothing ​(enter your response to the nearest whole number and include a minus sign if ​necessary).

Answer 1

The total current cost is given by Fixed Cost + Volume * Variable Cost

= 15000 + 30000*0.50 = 30000

Total current sale is given by Volume*Selling Price

= 30000*1.1 = 33000

Total Current profit is given by Total Sales - Total Cost = 33000-30000 = 3000

If the new equipment is added, the total fixed cost would be 15000 + 6000 = 21000

The new variable cost would be 0.60 and the new volume would be 50000.

The new total cost would be equal to 21000 + 50000 * 0.60 = 51000

The new total sales would be 50000*1.1 = 55000

The new total profit would be 55000 - 51000 = 4000.

As the profit with the new equipment is $ 5000, which is $1000 more than current profit, the new equipment should be added.