Question

AudioCables, Incorporated, is currently manufacturing an adapter that has a variable cost of $0.50 per unit and a selling price of $1.40 per unit. Fixed costs are $14,000. Current sales volume is 35,000 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 $0.75, but sales volume should jump to 50,000 units due to a higher-quality product.

a. What is the current profit and proposed profit from the sales of AudioCables?
Note: Negative amounts should be indicated by a minus sign. Answer is complete but not entirely correct.
b. Should AudioCables buy the new equipment? Yes ⊗ No There is insufficient information provided to answer this question.

Answer 1

AudioCables, Incorporated calculates its current profit at $17,500 and its proposed profit after improvements at $12,500. Due to the decrease in profit with the proposed changes, AudioCables should not invest in the new equipment under the assumption that maximizing profit is the sole focus.

Step-by-step explanation:

The student's question pertains to profit calculation and decision-making based on additional investment and changes in production costs and sales volume for AudioCables, Incorporated. To answer part a, we must first calculate the current profit before improvement, which is (Selling Price - Variable Cost) x Current Sales Volume - Fixed Costs. Subsequently, we calculate the proposed profit after improvement using the new variables for costs and projected sales volume.

Current Profit Calculation:
($1.40 - $0.50) x 35,000 units - $14,000 fixed costs = $31,500 - $14,000 = $17,500.

Proposed Profit Calculation:
($1.40 - $0.75) x 50,000 units -($14,000 + $6,000 additional fixed costs) = $32,500 - $20,000 = $12,500.

Part b: Should AudioCables buy the new equipment? Given that the proposed profit decreases from the current profit, the answer would be No, AudioCables should not buy the new equipment assuming all other factors remain constant and the sole focus is on profit.