Techno Corporation is currently manufacturing an item at variable costs of $4 pe

Question

Techno Corporation is currently manufacturing an item at variable costs of $4 per unit. Annual fixed costs of manufacturing this item are $140,000. The current selling price of the item is $11 per unit, and the annual sales volume is 35,000 units. a. Techno can substantially improve the item's quality by installing new equipment at additional annual fixed costs of $55,000. Variable costs per unit would increase by $1, but, as more of the better-quality product could be sold, the annual volume would increase to 55,000 units. Should Techno buy the new equipment and maintain the current price of the item? Why or why not? 1, because the profit ! | from sT] to $ (Enter your responses as integers.)

Explanation / Answer

Profit for Techno Corporation will be defined as :

Profit = Total revenue – Total cost = Price/ unit x Annual sales volume – Fixed cost – Variable cost/ unit x Annuals sales volume

Thus,

Current profit, $ = 11 x 35000 – 140,000 – 4 x 35,000 = 385,000 – 140,000 – 140,000 = $105,000

Scenario after installation of new equipment :

Revised fixed cost = $140,000 + $55,000 ( additional fixed cost ) = $195,000

Revised variable cost = $ 4 + $ 1 = $ 5 / unit

Revised annual volume = 55,000

Sales price ( unchanged ) = $11/ unit

Therefore, revised profit, $ = 11 x 55,000 – 195,000 - 5 x 55000 = 605,000 – 195,000 – 275,000 = $135,000

Since profit increases from $105,000 to $135,000 after buying the equipment, Techno should buy the new equipment

ANSWER : YES, BECAUSE PROFIT INCREASES FROM $105,000 TO $135,000

ANSWER : YES, BECAUSE PROFIT INCREASES FROM $105,000 TO $135,000

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