Question - HJM Auto Parts makes a muffler/pipe assembly for a cost of $45 each ($10 fixed and $35 variable) and then sells it for $68. The opportunity exists to modify this assembly (to a more fuel-efficient model) for additional direct materials and labor cost totaling $5 per unit. The new muffler/pipe model is expected to sell for $80.00 each. Variable selling and distribution costs would be the same at $10 per unit. Projected sales volume is 60,000 units per year for the new model, the same level of sales as for the current assembly. Labor resources are very tight at present but machine capacity is underutilized.
Required:
1. Should HJM modify the existing assembly?
2. What would be the increase/decrease in profit if HJM modifies the assembly?