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Fixed Cost/Variable Cost:new equipement

10.) Easy Tech Software Corp. is evaluating the production of a new software product to compete with the popular word processing software currently available. Annual fixed costs of producing the item are estimated at $150,000 and the variable cost is $10 per unit. The current selling price of the item is $35 per unit, and the annual sales volume is estimated at 50,000 units.

A. Easy Tech is considering adding new equipment that would improve software quality. The negative aspect of this new equipment would be an increase in both fixed and variable costs. Annual fixed costs would increase by $50,000 and variable costs by $3. However, marketing expects the better-quality product to increase demand to 70,000 units. Should Easy-Tech purchase this new equipment and keep the price of their product the same? Explain your reasoning.

B. Another option being considered by Easy-Tech is the increase in the selling price to $40 per unit to offset the additional equipment costs. However, this increase would result in a decrease in demand to 40,000 units. Should Easy-Tech increase its selling price if it purchases the new equipment? Explain

Solution Summary

Solution contains calculations of effect on profit if company purchases the new equipment.