abc enterprises sells a single product at price of 69 per unit. variable costs per unit are 42 and total fixed costs are 1455000. abc is considering the purchase of a new piece of equipment that would increase the fixed costs to 1785000 but decrease the variable costs per unit to 38. if abc company expects to sell 105000 units next year, should they purchase this new equipment?

Question

Javion Small

Business

3 March, 05:25

abc enterprises sells a single product at price of 69 per unit. variable costs per unit are 42 and total fixed costs are 1455000. abc is considering the purchase of a new piece of equipment that would increase the fixed costs to 1785000 but decrease the variable costs per unit to 38. if abc company expects to sell 105000 units next year, should they purchase this new equipment?

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Answers (1)

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Damian Esparza · Answer 1

Buy the new equipment

Explanation:

ABC enterprises should buy the equipment if it increases profitability.

Calculating operating income with the old machine

selling price = 69

variable cost = 42

Contribution margin per unit = 69 - 42

=27

total contribution margin = per unit contribution margin x total units

= 27 x 105 000

=2,835,000

operating income = total contribution margin - fixed costs

= 2, 835,000 - 1,455,000

=1,380,000

operating income with the new equipment

=contribution margin

=69-38

=31

Total contribution margin

= 31 x 105 000

=3,255,000

operating income

=3,255,000-1,785,000

=1,470,000

Income with the new equipment is higher than income with the old machine. Buy the new equipment