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Techno Corporation is currently manufacturing an item at var

1. Techno Corporation is currently manufacturing an item at variable costs of $ 5 per unit. Annual fixed costs of manufacturing this item are $ 140,000. The current selling price of the item is $ 10 per unit, and the annual sales volume is 30,000 units.

a. Techno can substantially improve the item's quality by installing new equipment at additional annual fixed costs of $ 60,000. Variable costs per unit would increase by $ 1, but, as more of the better- quality product could be sold, the annual volume would increase to 50,000 units. Should Techno buy the new equipment and maintain the current price of the item? Why or why not?

b. Alternatively, Techno could increase the selling price to $ 11 per unit. However, the annual sales volume would be limited to 45,000 units. Should Techno buy the new equipment and raise the price of the item? Why or why not?

Solution Preview

Currently, the variable costs of the unit = 150,000
Fixed costs = 140,000
Current revenue is 300,000
300,000 - 140,000 - 150,000 = 10,000

(a)

fixed costs = 140,000 + 60,000 = 200,000
variable costs = $6 per unit.
50,000 * 6 = 300,000 ...

Solution Summary

Techno Corporation is currently manufacturing an item at variable costs of $ 5 per unit. Annual fixed costs of manufacturing this item are $ 140,000. The current selling price of the item is $ 10 per unit, and the annual sales volume is 30,000 units.

a. Techno can substantially improve the item's quality by installing new equipment at additional annual fixed costs of $ 60,000. Variable costs per unit would increase by $ 1, but, as more of the better- quality product could be sold, the annual volume would increase to 50,000 units. Should Techno buy the new equipment and maintain the current price of the item? Why or why not?

b. Alternatively, Techno could increase the selling price to $ 11 per unit. However, the annual sales volume would be limited to 45,000 units. Should Techno buy the new equipment and raise the price of the item? Why or why not?

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