Problem 714 AudioCables Inc is currently manufacturing an ad

Problem 7-14 AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.60 per unit and a selling price of $1.10 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 60,000 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.) Current profit Proposed profit b. Should AudioCables buy the new equipment? Yes No There is insufficient information provided to answer this question

Solution

Current scenario :

Profit

= Sales – Total revenue – Total cost

= Price/ unit x Sales volume – Fixed cost – Variable cost / unit x Sales volume

Therefore, Profit , $

= 1.1 x 35000 – 14000 – 0.6 x 35000

= 38500 – 14000 – 21000

= $3500

Future scenario : Addition of new equipment :

Revised sales volume = 60,000

Revised variable cost = $ 0.75 / unit

Revised fixed cost = $14000 + $6000 = $20,000

Thus, Revised profit

= 1.1 x 60,000 – 20,000 – 0.75 x 60,000

= 66,000 – 20,000 -45000

= $1000

Since Revised profit under future scenario < Profit under current scenario , Audio cables should not buy the new equipment

CURRENT PROFIT = $3500

REVISED PROFIT = $1000

AUDIO CABLES SHOULD NOT BUY THE NW EQUIPMENT

CURRENT PROFIT = $3500

REVISED PROFIT = $1000

AUDIO CABLES SHOULD NOT BUY THE NW EQUIPMENT