Question

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.

Answer 1

(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.