Question

Finch Company currently produces and sells 7,500 units annually of a product that has a variable cost of $13 per unit and annual fixed costs of $251,500. The company currently earns a $71,000 annual profit. Assume that Finch has the opportunity to invest in new laborsaving production equipment that will enable the company to reduce variable costs to $11 per unit. The investment would cause fixed costs to increase by $10,400 because of additional depreciation cost.

Required  

A. Complete this question by entering your answers in the tabs below. 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 Finch invests in the new production equipment.

Answer 1

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	Anwer A
	Computation of sales price using equation
	Lets assume P is the sales price per unit
	q = quantity sold
	FC = Fixed cost
	V = variable cost per unit
	Profit = Profit
	Therefore
	P*q = FC + V*q+Profit
	P*7500= 251500+7500*13+71000
	p=	56.0
	Therefore price =		$   56.00	per unit
	Anwer B
	contribution margin income statement
i	Sales	=56*7500	420000
ii	Variable cost	=11*7500	82500
iii=i-ii	Contriution margin		337500
iv	Fixed cost	251500+10400	261900
v=iii-iv	Net operating margin		75600
	since net income has increased its worth taking new decision .