Question

Walton 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 $174,400. The company currently earns a $84,000 annual profit. Assume that Walton 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 $9,800 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 Walton invests in the new production equipment.

Answer 1

The sales price per unit under existing conditions : Unit $ 56,00

With this price the company keeps the same profit margin as before and without improvements.

Prepare a contribution margin income statement:

Contribution Margin with the improvements and under the actual price of Unit $ 56,00

$ 272,000 Contributing Margin

$ 87,800 Segment Margin

Step-by-step explanation:

The original situation before implementing the improvements it's:

Quantity Unit TOTAL Income Statement

6,800 $ 56,00 $ 380,800 Total Net Sales

$ 18,00 -$ 122,400 Variable Cost

$ 258,400 Contributing Margin

-$ 174,400 Anual Fixed Costs

$ 84,000 Segment Margin

If the improvements are implemented:

Quantity Unit TOTAL Income Statement

6,800 $ 56,00 $ 380,800 Total Net Sales

$ 16,00 -$ 108,800 Variable Cost

$ 272,000 Contributing Margin

-$ 184,200 Anual Fixed Costs

$ 87,800 Segment Margin