An electronic firm is currently manufacturing an item that has a variable cost of $0.50 per unit and a selling price of $1.00 per unit. Fixed costs are $14,000. The current volume is 30,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $6,000. The variable cost would increase to $0.60, but the volume should jump to 50,000 for the higher-quality product. Should the company buy the new equipment?

Because hula hoops have come back in style, Hoops Unlimited wants to enter the market quickly. It has three choices (a) refurbish the old equipment at a cost of $600, (b) make major modifications at the cost of $1,100 or (c) purchase new equipment at a net cost of $1,800. If the firm chooses to refurbish the equipment, materials and labor would be $1.10 per hoop. If it chooses to make modifications, materials and labor would be $0.70 per hoop. If it buys new equipment, variable costs are estimated to be $0.40 per hoop. Hula hoops sell for $2 per unit.

a. Which alternative should Hoops Unlimited choose if it thinks it could sell more than 3,000 hula hoops?

b. Which alternative should the firm use if it thinks the market for hoops would be between 1,600 and 2,400?