An electronics firm is currently manufacturing an item that has a variable cost

Question

An electronics firm is currently manufacturing an item that has a variable cost of $ 0.45 per unit and a selling price of $ 0.95 per unit. Fixed costs are $ 15 comma 000. Current volume is 35 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 $ 0.70 and the selling price would be revised to $ 1.05 with the expectation that the volume would be 50 comma 000 units as a result of a? higher-quality product. If the firm does not add new? equipment, its profit will be? = nothing dollars ?(round your response to the nearest whole number and include a minus sign if the profit is? negative). If the firm does add new? equipment, its profit will be? = nothing dollars ?(round your response to the nearest whole number and include a minus sign if the profit is? negative). Based on the given? information, the decision should be to ?

Explanation / Answer

Profit = (Revenue – Unit variable cost)*Quantity – Fixed cost

Current equipment:

Profit = (0.95-0.45)*35000 – 15000 = 2500

New equipment:

Profit = (1.05-0.7)*50000 – 21000 = -3500

Current equipment is best

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