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

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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 an $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.
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 Cobb invests in the new production equipment. Recommend whether Cobb should invest in the new equipment.
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Fundamental Managerial Accounting Concepts

ISBN: 978-1259569197

8th edition

Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds

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