Soldrum Company is considering automating its production facility. The initial i

Question

Soldrum Company is considering automating its production facility. The initial investment in automation would be $7.58 million, and the equipment has a useful life of 6 years with a residual value of $1.16 million. The company will use straight-line depreciation. Soldrum could expect a production increase of 46,000 units per year and a reduction of 20 percent in the labor cost per unit.

Complete the preceding table showing the totals. (Omit the "$" sign in your response.)

Soldrum Company is considering automating its production facility. The initial investment in automation would be $7.58 million, and the equipment has a useful life of 6 years with a residual value of $1.16 million. The company will use straight-line depreciation. Soldrum could expect a production increase of 46,000 units per year and a reduction of 20 percent in the labor cost per unit.

Explanation / Answer

Current
(no automation) Proposed
(automation)   Production and sales volume 82,000 units 128,000 units Per Unit Total Per Unit Total   Sales revenue           $ 91           82,000*91=$7,462,000           $ 91           128000*91=$11,648,000   Variable costs       Direct materials           $ 17                     $ 17                 Direct labor 20           16(20*0.8)          Variable manufacturing overhead 9           9             Total variable manufacturing costs 46           42 (17+16+9)   Contribution margin           $ 45           82,000*45=$3,690,000           $ 49           128,000*49=$6,272,000   Fixed manufacturing costs 1,120,000 2,350,000       Net income $3,690,000-1,120,000=$2,570,000 $6,272,000-2,350,000=$$3,922,000

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