Lukas Manufacturing is currently producing a tape holder that has a variable cost of $0.75 per unit and a 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 a new piece of equipment to the process line. This equipment represents an increase of $5,000 per year in fixed costs. The variable cost would decrease to $0.25 per unit.
The volume for the new and improved product should rise to 50,000 units a year.
(a) Should the company invest in the new equipment?
(b) At what volume does the equipment choice change?
(c) At a volume of 15,000 units, which process should be used?