Exercise 3-13A Conducting sensitivity analysis using the equation method LO 3-5

Question

Exercise 3-13A Conducting sensitivity analysis using the equation method LO 3-5 Adams Company currently produces and sells 8,300 units annually of a product that has a variable cost of $13 per unit and annual fixed costs of $316,400. The company currently earns a $82,000 annual profit. Assume that Adams has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $11 per unit. The investment would cause fixed costs to increase by $9,300 because of additional depreciation cost Required a. Use the equation method to determine the sales price per unit under existing conditions (current equipment is used) b. Prepare a contribution margin income statement, assuming that Adams invests in the new production equipment. Complete this question by entering your answers in the tabs b RequiredA Required B Prepare a contribution margin income statement, assuming that Adams invests in the new production equipment. ADAMS COMPANY Contribution margin Income statement Required A Required B

Explanation / Answer

Dear Student Thank you for using Chegg Please find below the answer Statementshowing Computations Paticulars Amount Let sales price be x 8,300 *x = 8,300 * 13 +316,400 + 82,000 8300x = 107,900 + 316,400 + 82,000 8,300x = 506,300 x = sales price per unit = $61 b) Sales = 8,300 *61        506,300.00 Less Variable Expenses = 8300*11           91,300.00 Contribution Margin = 506,300 - 91,300        415,000.00 Fixed cost = 316,400 + 9,300        325,700.00 Net operating income = 415,000 - 325,700           89,300.00

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