An electronics firm is currently manufacturing an item that has a variable cost of $0.60 per unit and selling price of $1.10 per unit. Fixed costs are $15,500. Current volume is 32,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $8,000. Variable cost would increase to $0.70, but volume is expected to jump to 50,000 units due to the higher quality of the product.
(a) Should the company buy the new equipment?
(b) Compute the profit with the current equipment and the expected profit with the new equipment.