Question

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 1

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