Gibson Company currently produces and sells 8,200 units annually of a product th

Question

Gibson Company currently produces and sells 8,200 units annually of a product that has a variable cost of $18 per unit and annual fixed costs of $281,600. The company currently earns a $71,000 annual profit. Assume that Gibson has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $16 per unit. The investment would cause fixed costs to increase by $10,500 because of additional depreciation cost.

Required

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

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

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

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

Explanation / Answer

1. The equation is :

  px = vx + FC + Profit i.e 8200*p = 18*8200 + 281600 + 71000 i. e p = $61 Answer

Sales price "p" = $61 per unit.

Contribution margin Income statement Sales 500200 Less: Variable cost 131200 Contribution 369000 Less: Fixed expenses 292100 Net Income 76900

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