Question

Use the following information for the Exercises below.

[The following information applies to the questions displayed below.]

Hudson Co. reports the contribution margin income statement for 2017.

HUDSON CO.
Contribution Margin Income Statement
For Year Ended December 31, 2017
Sales (9,800 units at $280 each)	$	2,744,000
Variable costs (9,800 units at $210 each)		2,058,000
Contribution margin	$	686,000
Fixed costs		504,000
Pretax income	$	182,000

\Assume the company is considering investing in a new machine that will increase its fixed costs by $41,500 per year and decrease its variable costs by $8 per unit. Prepare a forecasted contribution margin income statement for 2018 assuming the company purchases this machine.

	HUDSON CO. Forecasted Contribution Margin Income Statement For Year Ended December 31, 2018 Sales Variable costs Contribution margin Fixed costs Income (pretax) Should the company purchase the machine?

Answer 1

Answer -

Step - ( 1 ) - Information Given -

Hudson Co. reports the contribution margin income statement for 2017 -

• Sales (9800 units at $280 each) = $2744000.
• Variable costs (9800 units at $210 each) = $2058000.
• Contribution margin = $686000.
• Fixed costs = $504000.
• Pretax income = $182000.

Company is considering investing in a new machine that will increase its fixed costs by $41500 per year and decrease its variable costs by $8 per unit.

.

Step - ( 2 ) - Forecasted contribution margin income statement for 2018. Assuming the company purchases this machine.

HUDSON CO.

Forecasted Contribution Margin Income Statement

For Year Ended December 31, 2018.

Sales (9800 units at $280 each)	$2744000
Variable costs (9800 units at $202** each)	$1979600
Contribution margin [ $2744000 - $1979600 ]	$764400
Fixed costs [ $504000 + $41500 ]	$545500
Income (pretax) [ $764400 - $545500 ]	$218900

**Revised variable costs = $210 - $8 = $202 Per unit.

.

Should the Company purchase the Machine?

Yes, The Company should purchase the new Machine, because Income (pretax) increased by $36900 [$218900 - $182000]