Problem
AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.75 per unit and a selling price of $1.60 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 $0.90, but sales volume should jump to 50,000 units due to a higher-quality product.
i. What is the current profit and proposed profit of the sales of AudioCables? (Negative amounts should be indicated by a minus sign.)
ii. Should AudioCables buy the new equipment?