Question

AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.60 per unit and a selling price of $1.20 per unit. Fixed costs are $14,000. Current sales volume is 30,000 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 costs would increase to $0.75, but sales volume should jump to 50,000 units due to a higher-quality product. a. What is the current profit and proposed profit of the sales of AudioCables

Answer 1

The answer is "$4,000 and $2,500"

Step-by-step explanation:

Formula:

`\text{Profit = Sales - Total cost}`

`= \frac{\text{Selling price}}{unit} * \text{volume of Sale} - ( \text{Fixed cost} + \frac{\text{Variable cost}}{unit} * \text{volume of Sale})`

`= 1.20 * 30000 - ( 14,000 + 0.6 * 30,000)\\\\= 36,000 -( 14,000 + 18,000)\\\\= 36,000 - 14,000 - 18,000 \\\\= 36,000 - 32,000 \\\\= \$ 4,000`

The scenario was revised by installing new audio connection equipment:

The volume of revised sales
`= 50,000`

Fixed cost updated
`= \$ 41,000 + \$ 6,000 = \$ 20,000`

Cost of the updated component
`= (\$ 0.75)/(unit)`

Unchanged purchase price/unit
`= (\$ 1.2)/(unit)`

`= 1.2 * 50,000 -(20,000 + 0.75 * 50,000)\\\\= 60,000 -(20,000 + 37,500)\\\\= 60,000 -(57,500)\\\\= 60,000 -57,500 \\\\ =2,500`

Audio cable sales are actually profiting = 4,000

Proposal for audio cable sales profit = 2,500