Cobb Company currently produces and sells 9,000 units annually of a product that

Question

Cobb Company currently produces and sells 9,000 units annually of a product that has a variable cost of $20 per unit and annual fixed costs of $195,000. The company currently earns a $228,000 annual profit. Assume that Cobb 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 $25,000 because of additional depreciation cost.

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 Cobb invests in the new production equipment.

Explanation / Answer

1. Sales price / unit (Current equipment)

2. Contribution margin income statement ( New production equipment)

Profit 228000 Add: Fixed cost 195000 Contribution (228000+195000) 423000 Add: Variable cost (9000x20) 180000 Sales 603000 Sales price/ unit (603000/9000) 67

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