A firm has received an additional order for 50,000 units of product X at $20. The firm is currently operating at practical capacity of 600,000 units. To meet this order, new equipment at a cost of $200,000 would have to be purchased, and this equipment would have to be scrapped after the order had been filled. The firm currently sells product X for $50 per unit, has variable costs of $15.80, and fixed costs of $600,000. What is the additional profit (loss) for the firm if it accepts the order?
Question
A firm has received an additional order for 50,000 units of product X at 200,000 would have to be purchased, and this equipment would have to be scrapped after the order had been filled. The firm currently sells product X for 15.80, and fixed costs of $600,000. What is the additional profit (loss) for the firm if it accepts the order?
Solution
To calculate the additional profit or loss for the firm if it accepts the order, we need to consider the additional revenue, additional costs, and the cost of the new equipment.
Step 1: Calculate the additional revenue The additional revenue is the price per unit times the number of units in the additional order. 50,000 units * 1,000,000
Step 2: Calculate the additional variable costs The additional variable costs are the variable cost per unit times the number of units in the additional order. 50,000 units * 790,000
Step 3: Calculate the cost of the new equipment The cost of the new equipment is given as $200,000.
Step 4: Calculate the additional profit or loss The additional profit or loss is the additional revenue minus the additional variable costs and the cost of the new equipment. 790,000 - 10,000
So, the firm would make an additional profit of $10,000 if it accepts the order.
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