Question

Jack’s Grocery is manufacturing a "store brand" item that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment?

Answer 1

Answer:

No

Explanation:

In this question ,we compute the profit/net income

Net income = Sales - variable cost - fixed cost

where,

Sales = current volume × selling price per unit

         = 50,000 units × $1.25 per unit

         = $62,500

Variable cost = current volume × variable cost per unit

                      = 50,000 units × $0.75 per unit

                      = $37,500

And, the fixed cost is $12,000

Now put these values to the above formula  

So, the value would equal to

= $62,500 - $37,500 - $12,000

= $13,000

Now

Updated sales = updated volume × selling price per unit

                         = 70,000 units × $1.25 per unit

                         = $87,500

Updated fixed cost = updated volume × increased variable cost per unit

                                = 70,000 units × $1.00 per unit

                                = $70.000

And, updated fixed cost = Fixed cost + increased fixed cost

                                         = $12,000 + $5,000

                                         = $17,000

Now put these values to the above formula  

So, the value would equal to

= $87,500 - $70,000 - $17,000

= $500

Since, the profit reduced from $13,000 to $500. So, the company should not buy the new equipment