Techno Corporation is currently manufacturing an item at var

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? from $105000 to $ 135000. (Enter your responses as Yes , because the profit increases integers.) b. Alternatively, Techno could increase the selling price to $13 per unit. However, the annual sales volume would be limited to 40,000 units. Should Techno buy the new equipment and raise the price of the item? Why or why not? 1, because the profit w/ from $ to $ (Enter your responses as integers.)

Solution

Current:

Variable cost VC = $4 per unit

Fixed cost FC= 140000

Selling price P = $11

Sales volume Q = 35000

Profit = (P-VC) Q – FC

Profit = (11-4)35000 – 140000 = $1, 05,000

a)

Variable cost VC = $5 per unit

Fixed cost FC= =140000+55000 = 195000

Selling price P = $11

Sales volume Q = 55000

Profit = (11-5)55000 – 195000 = 1, 35000

Yes Techno should buy new equipment as the profit increases from 105000 to 135000

b)

Variable cost VC = $5 per unit

Fixed cost FC= =140000+55000 = 195000

Selling price P = $13

Sales volume Q = 40000

Profit = (13-5)40000 – 195000 =320000 – 195000 = 125000

No because the profit decreases from 135000 to 125000