Question

Spring Manufacturing sold 610,000 units of its product for $98 per unit in 2019. Variable cost per unit is $50, and total fixed costs are $1,870,000.

Required:
1.    Calculate (a) contribution margin and (b) operating income.
2.    Spring’s current manufacturing process is labor intensive. Jim Gate, Spring’s production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $6,770,000. The variable costs are expected to decrease to $35 per unit. Spring expects to maintain the same sales volume and selling price next year. How would acceptance of Gate’s proposal affect your answers to (a) and (b) in requirement 1?
3.    Should Spring accept Gate’s proposal? Explain.

Answer 1

	1a)	Contribution margin
		98-50
		48
	b)	operating income
		contribution - fixed cost
		48*610000-1870,000
		27410000
	2)
	a)	Contribution margin
		98-35
		63
		operating income
		contribution - fixed cost
		63*610000-6,770,000
		31660000
		contribution margin will increase by $35
		and net income will increase by			4250000
	3)	Yes