6.00 points AudioCables, Inc., is currently manufacturing an adapter that has a

Question

6.00 points AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.75 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 $0.90, but sales volume should jump to 50,000 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 Yes O No

Explanation / Answer

A.

Current profit = (price – variable cost)*no. of units – fixed cost

Current profit = (1.4-.75)*30000 – 14000

Current profit = $5500

Proposed profit = (1.4-.9)*50000 – (14000+6000)

Proposed profit = $5000

B.

Correct Answer:

No

Because, the existing profit is higher than the proposed profit.

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