Question

# Manufacturing sold 445,000 units of its product for \$70 per unit 2017. Variable cost per unit...

Manufacturing sold 445,000 units of its product for \$70 per unit 2017.

Variable cost per unit is \$60​,and total fixed costs are \$1,780,000.

 1 Calculate​ (a) contribution margin and​ (b) operating income. 2 Davidson​'s current manufacturing process is labor intensive. Kate Fischer​, Davidson​'s production​ manager, has proposed investing in​ state-of-the-art manufacturing​ equipment, which will increase the annual fixed costs to \$5,340,000. The variable costs are expected to decrease to \$42 per unit. Davidson expects to maintain the same sales volume and selling price next year. How would acceptance of Fischer​'s proposal affect your answers to​ (a) and​ (b) in requirement​ 1? 3 Should Davidson accept Fischer​'s proposal? Explain.

(1).

(a). Contribution margin = \$4450000

Explanation;

Contribution margin 445000 * (\$70 – \$60) = \$4450000

(b). Operating income = \$2670000

Explanation;

Operating income 445000 * (\$70 – \$60) – \$1780000 = \$2670000

(2).

(a). Contribution margin = \$12460000

Explanation;

Contribution margin 445000 * (\$70 – \$42) = \$12460000

(b). Operating income = \$7120000

Explanation;

Operating income 445000 * (\$70 – \$42) – \$5340000 = \$7120000

(3).

Davidson should accept Fischer​'s proposal because it will generate higher operating income.