Question

Q.5

Franklin Company currently produces and sells 7,700 units annually of a product that has a variable cost of $8 per unit and annual fixed costs of $287,900. The company currently earns a $74,000 annual profit. Assume that Franklin has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $6 per unit. The investment would cause fixed costs to increase by $9,000 because of additional depreciation cost.

Required

1. Use the equation method to determine the sales price per unit under existing conditions (current equipment is used).

2. Prepare a contribution margin income statement, assuming that Franklin invests in the new production equipment.

Complete this question by entering your answers in the tabs below. Required A Required B Use the equation method to determine the sales price per unit under existing conditions (current equipment is used). Sales price per unit

Answer 1

Required a :
( Selling price * Units sold ) - ( Variable cost per unit * Units sold ) - Fixed costs = Profit
( Selling price * 7700 ) - ( 8 * 7700 ) - 287900 = 74000
( Selling price * 7700 ) - 61600 - 287900 = 74000
Selling price * 7700 = 74000 + 61600 + 287900
Selling price * 7700 = 423500
Selling price = 423500 / 7700	55	per unit

Required b :
FRANKLIN COMPANY
Çontribution margin income statement
Sales ( 7700 * 55 )	423500
Variable cost ( 7700 * 6 )	46200
Contribution margin	377300
Fixed costs ( 287900 + 9000 )	296900
Profit	80400