The item quality by installing new equipment

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Reference no: EM132301634

1. Techno Corporation is currently manufacturing an item at variable costs of $ 5 per unit. Annual fixed costs of manufacturing this item are $ 140,000. The current selling price of the item is $ 11 per unit, and the annual sales volume is 25,000 units.

a) Techno can substantially improve the item's quality by installing new equipment at additional annual fixed costs of $ 65,000. Variable costs per unit would increase by $ 1, but, as more of the better- quality product could be sold, the annual volume would increase to 45,000 units. Should Techno buy the new equipment and maintain the current price of the item? Why or why not?

b. Alternatively, Techno could increase the selling price to $ 11 per unit. However, the annual sales volume would be limited to 45,000 units. Should Techno buy the new equipment and raise the price of the item? Why or why not?

Reference no: EM132301634

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