Asked by Amber Koeuth on May 09, 2024
Verified
Louis Company sells a single product at a price of $65 per unit. Variable costs per unit are $45, and total fixed costs are $625,500. Louis is considering the purchase of a new piece of equipment that would increase the fixed costs to $800,000 but decrease the variable costs per unit to $42.If Louis Company expects to sell 44,000 units next year, should it purchase this new equipment?
Variable Costs
Expenses that change in proportion to the activity or volume of production, sales, or services rendered.
Fixed Costs
Charges that are unaffected by production or sales volume, for example, monthly rent or payroll expenses.
Selling Price
The price at which a product or service is offered to customers.
- Compute the break-even threshold in terms of units and currency, appreciating its significance for strategic planning in business.
- Investigate the effects of changes in sales volume, cost structures, and price levels on the profitability and break-even point of a company.
Verified Answer
LL
lai ling leungMay 10, 2024
Final Answer :
Under the current system, Louis's profit when 44,000 units are sold is
[($65 - $45) × 44,000] - $625,500 = $254,500
If the new equipment is purchased, Louis's profit when 44,000 units are sold is
[($65 - $42) × 44,000] - $800,000 = $212,000
Louis is better off not buying the new equipment.
[($65 - $45) × 44,000] - $625,500 = $254,500
If the new equipment is purchased, Louis's profit when 44,000 units are sold is
[($65 - $42) × 44,000] - $800,000 = $212,000
Louis is better off not buying the new equipment.
Learning Objectives
- Compute the break-even threshold in terms of units and currency, appreciating its significance for strategic planning in business.
- Investigate the effects of changes in sales volume, cost structures, and price levels on the profitability and break-even point of a company.