Question

Munoz Company currently produces and sells 7,400 units annually of a product that has a variable cost of $15 per unit and annual fixed costs of $247,200. The company currently earns a $71,000 annual profit. Assume that Munoz has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $13 per unit. The investment would cause fixed costs to increase by $10,900 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 Munoz invests in the new production equipment.

Answer 1

solutions © (1) Sales price lunit Ccument equipment) profit $7109 00 Add & fixed cost 247200 contri bution 318200 Add: variable cost (1400x95) $ 11000 Sales 429200 Sales price lunil- 14292.00 7400 58 (2) Contribution Margin Income statement (Newpoduction eguppment) sales 429200 Less! variable cost Troux 13) 96200 contribution Lessis fixed cost (247 80ot 10900) 33300D 258100 profit 74900