The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 25%. Currently, sales are $750,000 per year and variable costs are 55% of sales. The equipment is expected to last for 5 years with no residual value. The cash outflow expected at the beginning of the year is $ 357,500. 37) By how much would Terme's annual gross profit increase if the investment is undertaken

Question

Damari Vaughn

Business

27 March, 13:34

The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 25%. Currently, sales are $750,000 per year and variable costs are 55% of sales. The equipment is expected to last for 5 years with no residual value. The cash outflow expected at the beginning of the year is $ 357,500. 37) By how much would Terme's annual gross profit increase if the investment is undertaken

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Heath Skinner · Answer 1

The increase in gross profit is $12,374.93

Explanation:

The increase in sales due to purchasing this new equipment is 25% of current sales figure of $750,000

increase in sales=$750,000*25%=$187,500

variable cost on the increase in sales is 55%=$187500 * 55%=$103,125

The annual depreciation charge on the new equipment=cost of the new equipment-salvage value/useful life

cost of the new equipment is $357,500.37

salvage value is $0

useful life of the new equipment is 5 years

annual depreciation charge = ($357,500.37-$0) / 5=$ 71,500.07

Increase / (decrease) in annual gross profit=$187,000-$103,125-$ 71,500.07 = $12,374.93