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2 May, 08:24

Jack's Grocery is manufacturing a "store brand" item that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment?

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  1. 2 May, 09:44
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    No

    Explanation:

    In this question, we compute the profit/net income

    Net income = Sales - variable cost - fixed cost

    where,

    Sales = current volume * selling price per unit

    = 50,000 units * $1.25 per unit

    = $62,500

    Variable cost = current volume * variable cost per unit

    = 50,000 units * $0.75 per unit

    = $37,500

    And, the fixed cost is $12,000

    Now put these values to the above formula

    So, the value would equal to

    = $62,500 - $37,500 - $12,000

    = $13,000

    Now

    Updated sales = updated volume * selling price per unit

    = 70,000 units * $1.25 per unit

    = $87,500

    Updated fixed cost = updated volume * increased variable cost per unit

    = 70,000 units * $1.00 per unit

    = $70.000

    And, updated fixed cost = Fixed cost + increased fixed cost

    = $12,000 + $5,000

    = $17,000

    Now put these values to the above formula

    So, the value would equal to

    = $87,500 - $70,000 - $17,000

    = $500

    Since, the profit reduced from $13,000 to $500. So, the company should not buy the new equipment
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