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The Terme Corporation is contemplating the purchase of new equipment,which may potentially increase revenues by 25%.Currently,sales are $750,000 per year and variable costs are 55% of sales.The equipment is expected to last for 5 years with no residual value.The cash outflow expected at the beginning of the year is $ 357,500.
-By how much would Terme's annual gross profit increase if the investment is undertaken?

Question

Quizplus · Accepted Answer

The increase in annual gross profit is equal to the increase in sales revenue minus the increase in variable costs. The increase in sales revenue is 25% of $750,000, or $187,500. The increase in variable costs is 55% of $187,500, or $103,125. Therefore, the increase in annual gross profit is $187,500 - $103,125 = $84,375.

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