Scott Randall operates a small manufacturing company that makes basic sound pre-amplifiers. Scott buys the wafer from one company, then does the slicing and packaging himself. He has several employees that help with the tasks. Each pre-amp sells for $4.50. There is $1.50 in variable costs for labor and materials for each pre-amplifier sold. Fixed costs are significant because Scott needs to have very precise and expensive machinery to slice the wafers, test the resulting wafer, and then package it to customer specifications. His fixed costs of operations are $25,000 per year.

REQUIRED:

a. Develop Scott’s cost formula per year of sales.

b. What is the breakeven formula in number of pre-amplifiers sold?

c. What is Scott’s breakeven revenue?

d. Scott wants to make $60,000 per year in before- tax profits for running his business. Now how many units does he have to sell?

e. Scott wants this $60,000 in after-tax profit. Now how many units does he have to sell? He pays 30% on average in income tax.

f. Scott has been approached by a salesman for various high- tech machines. He claims he can replace two of Scott’s current machines at an additional fixed cost of $25,000 per year but a reduction in variable costs of $0.25 per unit made. Should Scott buy the new machine? Why or why not? Develop a brief business case to explain your recommendations.