The electronics firm in Problem is now considering the new equipment and increasing the selling price to $1.10 per unit. With the higher-quality product, the new volume is expected to be 45,000 units. Under these circumstances, should the company purchase the new equipment and increase the selling price?
Problem
An electronics firm is currently manufacturing an item that has a variable cost of $.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 $6,000. Variable cost would increase to $.60, but volume should jump to 50,000 units due to a higher-quality product. Should the company buy the new equipment?