Posted on by Judy

AudioCables, Inc., 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 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 $0.75, but sales volume should jump to 50,000 units due to a higher-quality product. a. What is the current profit and proposed profit of the sales of AudioCables? (Negative amounts should be indicated by a minus sign.) b. Should AudioCables buy the new equipment? Yes No There is insufficient information provided to answer this question

a) Currently the fixed cost (FC) = $14000
Variable cost (VC) = $0.50
Selling price (SP) = $1.40 per unit
Sales volume (Q) = 30000 units
Current profit = Q(SP – VC) – FC
= 30000(1.40-0.50) – 14000
= (30000 x 0.90) – 14000
= 27000 – 14000
= $13000
With the addition of new piece of equipment,
Fixed cost (FC) = $14000+$6000 = $20000
Variable cost (VC) = $0.75
Selling price (SP) = $1.40
Sales volume (Q) = 50000 units
Proposed profit = Q(SP – VC) – FC
= 50000(1.40-0.75) – 20000
= (50000 x 0.65) – 20000
= 32500 – 20000
= $12500
b) Audio cables should not buy the new equipment because it will yield a lower profit.
 
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