Explain and show work Perez Company currently produces and sells 8,200 units ann

Question

Explain and show work

Perez Company currently produces and sells 8,200 units annually of a product that has a variable cost of $17 per unit and annual fixed costs of $247,200. The company currently earns a $89,000 annual profit. Assume that Perez has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $15 per unit. The investment would cause fixed costs to increase by $10,100 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 Perez invests in the new production equipment. Complete this question by entering your answers in the tabs below Required ARequired B Use the equation method to determine the sales price per unit under existing conditions (current equipment is used) ales price per unit

Explanation / Answer

(a)

Let the selling price per unit be $Z

Variable cost per unit = $17

Annual fixed cost = $247,200

Number of units sold = 8,200

Annual profit = $89,000

Annual Sales revenue = 8,200 x Y

= $8,200Y

Annual variable cost = 8,200 x 17

= $139,400

Annual profit = Annual sales - annual variable cost - Annual fixed cost

89,000 = 8,200Y - 139,400 - 247,200

8,200Y = 89,000 + 386,600

Y = 475,600/8,200

Y = $58

Hence, selling price per unit = $58

(b)

Variable cost after reduction = $15 per unit

Increase in fixed cost = $10,100

Hence, new fixed cost = 247,200 + 10,100

= $257,300

Contribution margin income statement

Sales (8,200 x 58) 475,600 Less: Variable cost (8,200 x 15) -123,000 Contribution margin 352,600 Less: Fixed cost -257,300 Profit 95,300

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