Question

# Spring Manufacturing sold 610,000 units of its product for \$98 per unit in 2019. Variable cost...

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.

 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

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