Question

I need to understand how to get the sales price too:)

Fanning Company currently produces and sells 8,000 units annually of a product that has a variable cost of $13 per unit and annual fixed costs of $298,000. The company currently earns a $78,000 annual profit. Assume that Fanning has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $11 per unit. The investment would cause fixed costs to increase by $10,500 because of additional depreciation cost. Required a. 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 Fanning invests in the new production equipment. Complete this question by entering your answers in the tabs below. Required A Required B Prepare a contribution margin income statement, assuming that Fanning invests in the new production equipment. FANNING COMPANY Contribution margin Income statement < Required A Required B

Answer 1

1) Calculate selling price under equation method :

Profit = Sales-Variable cost-Fixed cost

78000 = 8000X-(8000*13)-298000

78000 = 8000X-402000

Selling price = 480000/8000 = 60

2) Contribution margin income statement

Sales (8000*60)	480000
Variable cost (8000*11)	88000
Contribution margin	392000
Fixed cost (298000+10500)	308500
Net income	83500