An electronics firm is currently manufacturing an item that has the variable cost of $0.50 per unit and selling price of $1.00 per unit. Fixed costs are$14,000 per month. Current volume is 30,000 units for each month. The firm wants to enhance the product quality by adding a new piece of equipment at additional fixed cost of $6,000 a month. Variable cost would raise to $0.60 a unit but volume must jump to 50,000 units the month because improved productivity. Although the new product is of the higher quality, the firm intends to stay with the selling price of $1.00 per unit (for competitive purposes).
(a) Should the firm purchase the new equipment?
(b) The firm is now considering stepping the new volume to 45,000 units the month to produce even better quality products and raise the selling price to $1.10 a unit. Under such circumstances, should the company purchase the new equipment and raise the selling price?
Lukas Manufacturing is currently producing the tape holder that has variable cost of $0.75 per unit and selling price of $2.00 per unit. Fixed costs are $20,000 a year. Current volume is 40,000 units a year. The firm can produce a better product by adding the new piece of equipment to the procedure line. This equipment represents an raise of $5,000 per year in fixed costs. The variable cost would reduce to $0.25 per unit. The volume for new and improved product should rise to 50,000 units a year.
(a) Must the company invest in new equipment?
(b) At what volume does equipment choice change?
(c) At a volume of 15,000 units, which process must be used?