Question

Exercise 3-13A (Algo) Conducting sensitivity analysis using the equation method LO 3-5 Baird Company currently produces and sells 7,800 units annually of a product that has a variable cost of $6 per unit and annual fixed costs of $447,600. The company currently earns a $75,000 annual profit. Assume that Baird has the opportunity to invest in new laborsaving production equipment that will enable the company to reduce variable costs to $4 per unit. The investment would cause fixed costs to increase by $9,900 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 Baird invests in the new production equipment. Complete this question by entering your answers in the tabs below. Use the equation method to determine the sales price per unit under existing conditions (current equipment is used). Exercise 3-13A (Algo) Conducting sensitivity analysis using the equation method LO 3-5 Baird Company currently produces and sells 7,800 units annually of a product that has a variable cost of $6 per unit and annual fixed costs of $447,600. The company currently earns a $75,000 annual profit. Assume that Baird has the opportunity to invest in new labor saving production equipment that will enable the company to reduce variable costs to $4 per unit. The investment would cause fixed costs to increase by $9,900 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 Baird invests in the new production equipment. Complete this question by entering your answers in the tabs below. Prepare a contribution margin income statement, assuming that Baird invests in the new production equipment.

Answer 1

To find the sales price per unit, the given profit equation is used, placing known values for profit, quantity sold, variable cost, and fixed cost. For the contribution margin income statement with new equipment, we consider the changes to the fixed costs and variable costs to compute the net income.

Step-by-step explanation:

To answer the question, we first need to use the equation method to determine the sales price per unit. The equation for the total profit is:

Total Profit = (Sales Price per Unit x Quantity Sold) - (Variable Cost per Unit x Quantity Sold) - Fixed Costs

Given the details:

• Current Total Profit = $75,000
• Quantity Sold = 7,800 units
• Variable Cost per Unit = $6
• Fixed Costs = $447,600

Substituting the values into the equation, we get:

$75,000 = (Sales Price per Unit x 7,800) - ($6 x 7,800) - $447,600

Next, we need to prepare a contribution margin income statement assuming Baird invests in the new production equipment, with the increased fixed costs and decreased variable costs.

The revised equation considering the new fixed costs of $457,500 ($447,600 + $9,900) and variable costs of $4 per unit is as follows:

Contribution Margin = Sales Price per Unit - Variable Cost per Unit

Net Income = (Contribution Margin x Quantity Sold) - Fixed Costs

This income statement will include the new variable and fixed cost changes and will calculate the new net income.