AudioCables, Inc., is currently manufacturing an adapter that has a variable cos

Question

AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.50 per unit and a selling price of $1.20 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 $0.70, but sales volume should jump to 60,000 units due to a higher-quality product. a. What is the current profit and proposed profit of the sales of AudioCables? (Negative amounts should be indicated by a minus sign.) Current profit Proposed profit b. Should AudioCables buy the new equipment? O No Yes

Explanation / Answer

(a)

Profit = Volume * (Selling Price - Unit variable cost) - Fixed cost

So, current profit = 30,000 * (1.20 - 0.50) - 14,000 = $7,000

Proposed profit = 60,000 * (1.20 - 0.70) - (14,000 + 6,000) = $10,000

(b)

Yes, becasue the profit increases.

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