Problem
An electronics firm is currently manufacturing an item that has a variable cost of $0.50 per unit and a selling price of $1.00 per unit. Fixed costs are $14 000. Current 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 $6000. Variable cost would increase to $0.60, but volume should jump to 50 000 units due to a higher-quality product.
Should the company buy the new equipment?