Question

# Campbell Company currently produces and sells 7,400 units annually of a product that has a variable...

Campbell Company currently produces and sells 7,400 units annually of a product that has a variable cost of \$9 per unit and annual fixed costs of \$364,000. The company currently earns a \$80,000 annual profit. Assume that Campbell has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to \$7 per unit. The investment would cause fixed costs to increase by \$10,800 because of additional depreciation cost.

Required

a)Use the equation method to determine the sales price per unit under existing conditions (current equipment is used).

b)Prepare a contribution margin income statement, assuming that Campbell invests in the new production equipment.

 Answer to Part 1 Let the selling price of the unit be 'x' Sales 7400*x 7400*x Variable Cost 7400*9 66,600 Contribution 7400*(X-9) 4,44,000 Fixed Costs 3,64,000 Net Income 80,000
 7400*(x-9) = 444,000 x-9 = 444,000/7400 x-9 = 60 x = 60+9 x = 69

Therefore, the selling price per unit = \$ 69.

 Answer to Part 2 Particulars Calculation Amount (\$) Sales 69*7400 510600 Less: Variable Costs 7*7400 51800 Contribution 458800 Less: Fixed Costs 364000+10800 374800 Net Income 84000

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