Zachary Company currently produces and sells 6,800 units annually of a product that has a variable cost of $18 per unit and annual fixed costs of $276,600. The company currently earns a $77,000 annual profit. Assume that Zachary 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 $9,700 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 Zachary invests in the new production equipment.

Zachary Company

a. Selling price per unit = $70

b. Contribution Margin Income Statement, assuming that Zachary invests in the new production equipment:

Sales Revenue                           $476,000

Variable cost ($16 * 6,800)           108,800

Contribution                               $367,200

Fixed costs ($276,600 + 9,700) 286,300

Net income                                  $80,900

Explanation:

a) Data and Calculations:

Annual production and sales = 6,800 units

Variable cost per unit = $18

Total variable cost = $122,400 ($18 * 6,800)

Fixed costs = $276,600

Total cost = $399,000 ($122,400 + $276,600)

Annual profit earned = $77,000

Therefore, sales revenue = $476,000 ($399,000 + $77,000)

Selling price per unit = $70 ($476,000/6,800)