Question

The Carla Vista Publications Textbook Company sells all of its books for $100 per book, and it currently costs $50 in variable costs to produce each text. The fixed costs, which include depreciation and amortization for the firm, are currently $2 million per year. Management is considering changing the firm’s production technology, which will increase the fixed costs for the firm by 32 percent but decrease the variable costs per unit by 32 percent. If management expects to sell 45,000 books next year, should they switch technologies? (Round answers to nearest whole dollar,e.g. 5,275.)

1.Currenmt EBIT?

2. If the firm changes technology, the firm’s new EBIT will be $?

3.should the firm adopt/reject?

The current EBIT for the firm is $

Answer 1

Given,
Selling Price of each book = $ 100
Variable Cost of each book = $ 50
Fixed Cost = $2,000,000
If technology is changed, then fixed cost will increase by 32% while variable cost will decrease by 32%.
Total number of books to be sold = 45,000 books
Part 1:
Calculation of Current EBIT of Carla Vista Publications Textbook Company
Total Sales		$4,500,000
($ 100 * 45,000)
Less: Variable Cost		$2,250,000
($ 50 * 45,000)		____________
Gross Profit		$2,250,000
Less: Fixed Costs		$2,000,000
Net Profit (EBIT)		$250,000
Part 2:
Calculation of Revised EBIT of Carla Vista Publications Textbook Company
Total Sales		$4,500,000
($ 100 * 45,000)
Less: Variable Cost		$1,530,000
($ 34* 45,000)		__________
Gross Profit		$2,970,000
Less: Fixed Costs		$2,640,000
Net Profit (EBIT)		$330,000
Revised Variable Cost = $ 50 x (1 - 0.32)
Revised Variable Cost = $ 34
Revised Fixed Cost = $ 2,000,000 x 1.32
Revised Fixed Cost = $ 2,640,000
Part 3:
Since, the revised EBIT due to change in technology is $ 330,000 which is $80,000 excess than the current EBIT,
therefore, the company shall adopt the new technology.