Question

AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.75 per unit and a selling price of $1.50 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. Should AudioCable buy a new equipment?

Answer 1

Yes

Step-by-step explanation:

In this question, we find the net income under two situations which are shown below:

First situation:

Net income = Sales - variable cost - fixed cost

where,

Sales = Number of sales units × selling price per unit

= 30,000 units × $1.50

= $45,000

Variable cost = Number of sales units × selling price per unit

= 30,000 units × $0.75

= $22,500

And, the fixed cost is $14,000

Now put these values to the above formula

So, the value would be equal to

= $45,000 - $22,500 - $14,000

= $8,500

Second situation:

Net income = Sales - variable cost - fixed cost

where,

Sales = Number of sales units × selling price per unit

= 50,000 units × $1.50

= $75,000

Variable cost = Number of sales units × selling price per unit

= 50,000 units × $0.90

= $45,000

And, the fixed cost is $20,000

Now put these values to the above formula

So, the value would be equal to

= $75,000 - $45,000 - $20,000

= $10,000

The company should buy the equipment as it generates the net income of $10,000