An electronics firm is currently manufacturing an item that has a variable cost of $ 0.50 per unit and selling price of $ 1.00 per unit. Fixed costs are $ 14,000. Current 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 cost would increase to $ 0.60, but volume is expected to jump to 55,000 units due to the higher quality of the product.
a) Compute the profit with the current equipment and the expected profit with the new equipment. Should the company buy the new equipment? Show your work.
b) The electronics firm 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 50,000 units. Under these circumstances, should the company purchase the new equipment and increase the selling price. Show your work.